10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                      TO                    

Commission File Number 000-27701

HEALTHSTREAM, INC.

(Exact name of registrant as specified in its charter)

Tennessee	62-1443555
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
209 10th Avenue South, Suite 450 Nashville, Tennessee	37203
(Address of principal executive offices)	(Zip Code)

(615) 301-3100

(Registrant’s telephone number, including area code)

Securities Registered Pursuant To Section 12(b) Of The Act:

Title of each class	Name of each Exchange on which registered
Common Stock, No Par Value	NASDAQ Global Select Market

Securities Registered Pursuant To Section 12(g) Of The Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of 15(d) of the Act.    Yes  ¨    No  x

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The aggregate market value of the Common Stock issued and outstanding and held by non-affiliates of the Registrant, based upon the closing sales price for the Common Stock on the NASDAQ Global Select Market on June 28, 2013 was approximately $514.3 million. All executive officers and directors of the registrant have been deemed, solely for the purpose of the foregoing calculation, to be “affiliates” of the registrant.

As of February 28, 2014, there were 27,420,090 shares of the Registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement for its 2014 Annual Meeting of Shareholders are incorporated by reference into Part III hereof.

HEALTHSTREAM, INC.

TABLE OF CONTENTS

ANNUAL REPORT ON FORM 10-K

		Page
PART I
Item 1.	Business		1
Item 1A.	Risk Factors		10
Item 1B.	Unresolved Staff Comments		18
Item 2.	Properties		18
Item 3.	Legal Proceedings		18
Item 4.	Mine Safety Disclosures		18
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		18
Item 6.	Selected Financial Data		20
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		20
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		30
Item 8.	Financial Statements and Supplementary Data		31
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		55
Item 9A.	Controls and Procedures		55
Item 9B.	Other Information		55
PART III
Item 10.	Directors, Executive Officers and Corporate Governance		56
Item 11.	Executive Compensation		56
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		56
Item 13.	Certain Relationships and Related Transactions, and Director Independence		56
Item 14.	Principal Accounting Fees and Services		56
PART IV
Item 15.	Exhibits, Financial Statement Schedules		57
	Signatures		58

PART I

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements include, among others, those statements including the words “expects,” “anticipates,” “intends,” “believes,” “may,” “will,” “should,” “continue” and similar language or the negative of such terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, HealthStream’s actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section “Risk Factors” in Item 1A of this Annual Report on Form 10-K and elsewhere in this document. In addition, factors that we are not currently aware of could harm our future operating results. You should carefully review the risks described in other documents HealthStream files from time to time with the Securities and Exchange Commission. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. HealthStream undertakes no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.

Item 1. Business

OVERVIEW AND HISTORY

HealthStream, Inc. (HealthStream or the Company) provides SaaS-based workforce development solutions and research/patient experience solutions for healthcare organizations—all designed to assess and develop the people that deliver patient care which, in turn, supports the improvement of business and clinical outcomes. Our workforce development products are used by healthcare organizations to meet a broad range of their training, certification, competency assessment, performance appraisal, and development needs, while our research/patient experience products provide our customers information about patients’ experiences and how to improve them, workforce engagement, physician relations, and community perceptions of their services. HealthStream’s customers include healthcare organizations, pharmaceutical and medical device companies, and other participants in the healthcare industry. Our customer base includes approximately 4,000 healthcare organizations (predominately acute-care facilities) throughout all 50 states.

At December 31, 2013, HealthStream had approximately 3.71 million “total subscribers” to its subscription-based solutions. Each individual end-user who utilizes at least one HealthStream subscription-based solution is counted as one subscriber, regardless of the number of subscriptions contracted by or for that end-user. Of our 3.71 million total subscribers, 3.39 million were already implemented as of December 31, 2013 and 316,000 were in the process of implementation. Our subscription-based solutions include any of our platform applications, plus courseware or content. We deliver educational activities and training courseware to our customers through our platform application, the HealthStream Learning Center™ (HLC), while we deliver competency management and performance appraisal tools through our platform applications the HealthStream Competency Center (HCC) and HealthStream Performance Center (HPC), respectively, all on our SaaS-based platform. Our research/patient experience products and service offerings include quality and satisfaction surveys, data analyses of survey results, patient experience evaluation and improvement, and other research-based measurement tools focused on patients, physicians, employees, and members of the community. Our core research/patient experience product is the Patient Insights™ survey, which accounted for approximately 78 percent of our research/patient experience solutions business, based on revenue, during 2013.

As we place greater emphasis on offering our customers new and innovative ways of assessing and developing their workforces, simulation is becoming a growing part of our product portfolio. We have a collaborative arrangement with Laerdal Medical A/S (Laerdal Medical), a leader in healthcare simulation, to provide a suite of products for distributing training simulations and scenarios directly over the Internet and managing simulation centers worldwide. SimStore^® allows simulation customers to sample, license, and download scenarios directly to simulators over the Internet. SimManager is an application for managing simulation centers that shares the same platform with our HLC, and was launched in early 2012. We have a long-term relationship with Laerdal Medical and have been a distributor of its HeartCode^TM product line for the last seven years. HeartCode^TM uses task based manikins that assist healthcare professionals in studying, training, and testing for what is commonly known as cardiopulmonary resuscitation (CPR) certification.

Headquartered in Nashville, Tennessee, the Company was incorporated in 1990 and began providing its SaaS-based solutions in 1999 and its survey and research solutions in 2005. Including additional offices in Laurel, Maryland, Brentwood, Tennessee, and Pensacola, Florida, HealthStream had 598 full-time and 88 part-time employees as of December 31, 2013. Our business has evolved from an initial focus on technology-based training to a company providing workforce development and research/patient experience solutions to the nation’s healthcare providers.

INDUSTRY BACKGROUND

According to the deputy director of the National Health Statistics Group at the Centers for Medicare and Medicaid Services (CMS), spending in the healthcare industry reached approximately $2.79 trillion in 2012, or 17.2% of the U.S. gross domestic product. Hospital care expenditures accounted for approximately 33.5% of the $2.79 trillion industry. According to the Bureau of Labor Statistics, approximately 17.8 million professionals are employed in the healthcare segment of the domestic economy, with approximately 4.8 million employed in acute-care hospitals and approximately 3.2 million employed in post-acute-care organizations, our primary target markets for our workforce development and research/patient experience products. As of December 31, 2013, approximately 3.71 million healthcare professionals were subscribers to our SaaS-based solutions, which include 3.39 million subscribers already implemented and 316,000 subscribers in the process of implementation.

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All of the 4.8 million hospital-based healthcare professionals that work in the nation’s approximately 5,000 acute-care hospitals are required by federal mandates and accrediting bodies to complete training in a number of areas. This training includes safety training mandated by both the Occupational Safety and Health Administration (OSHA) and The Joint Commission (an independent, not-for-profit organization that accredits and certifies healthcare organizations and programs in the United States), as well as training on patient information confidentiality required under the Health Insurance Portability and Accountability Act (HIPAA).

In hospitals, staffing issues and personnel shortages have also contributed to the need for facility based workforce development as well as additional assessment and competency based training. For example, the American Hospital Association’s (AHA) report “Workforce 2015: Strategy Trumps Shortage” (January 2010) estimates that the shortfall of physicians in 2020 will be approximately 109,000 and the shortage of registered nurses in 2025 will be the equivalent of 260,000 full-time employees. We believe that offering training and education for hospital personnel is increasingly being utilized as a retention and recruitment incentive.

Many healthcare professionals use continuing education to keep abreast of the latest developments and meet licensing and certification requirements. Continuing education is required for nurses, emergency medical services personnel, first responder personnel, radiologic personnel, and physicians. Pharmaceutical and medical device companies must also provide their medical industry sales representatives with training mandated for the healthcare industry and training for new products. Such companies also provide support and content for education and training of audiences that use their products in healthcare organizations.

A large portion of the nation’s hospitals utilize research and survey tools to gain insight about patients’ experiences, to assess workforce competency and engagement, to determine the status of physician relations, and to measure the perceptions about the hospitals in the communities they serve. Industry-wide interest is increasing in research due in part, to the CAHPS^® (Consumer Assessment of Healthcare Providers and Systems) Hospital Survey launched by CMS in partnership with the Agency for Healthcare Research and Quality (AHRQ). Hospitals must submit data to CMS for certain required quality measures—which for inpatients includes the CAHPS^® Hospital Survey—in order to receive the full market basket increase to their reimbursement payment rates from CMS. Hospitals that fail to submit this survey data will incur a reduction of two percentage points in the inpatient market basket update amount for the following federal fiscal year. We are designated as a certified vendor for and offer CAHPS^® Hospital Survey services.

The healthcare education industry is highly fragmented, varies significantly in delivery methods (i.e., online products, live events, written materials, and manikins for simulation-based training), and is composed of a wide variety of entities competing for customers. The sheer volume of healthcare information available to satisfy continuing education needs, rapid advances in medical developments, and the time constraints that healthcare professionals face make it difficult to quickly and efficiently access the continuing education content most relevant to an individual’s practice or profession. Historically, healthcare professionals have received continuing education and training through offline publications, such as medical journals or by attending conferences and seminars. In addition, other healthcare workers and pharmaceutical and medical device manufacturers’ sales and internal regulatory personnel usually fulfill their training from external vendors or internal training departments. While these approaches satisfy the ongoing education and training requirements, they are typically costly and inconvenient. In addition, live courses are often limited in the breadth of offerings and do not provide a method for tracking training completion. The results of these traditional methods, both from a business and compliance standpoint, are difficult to track and measure. While hospitals and health systems occasionally survey their patients, physicians, and employees using their own internal resources, the practice is limited since they do not typically possess the valuable comparative benchmarking data that is available from independent survey research vendors.

Finally, the hospital industry continues to operate under intense pressure to reduce costs as a result of reductions in government reimbursement rates and increased focus on cost containment consistent with participation of patients in managed care programs. In addition, hospitals, as well as pharmaceutical and medical device companies, continue to experience rising operating costs, coupled with increased pressure to measure and report on the outcomes of the dollars spent on training. Our products and services are designed to meet these needs by reducing healthcare organizations’ costs of training while improving learning outcomes, enhancing reporting capabilities, and supporting customers’ business objectives.

HEALTHSTREAM’S SOLUTIONS

HealthStream’s products and services are organized into two segments—HealthStream Workforce Development Solutions (formerly referenced as HealthStream Learning & Talent Management) and HealthStream Research/Patient Experience Solutions (formerly referenced as HealthStream Research)—that collectively help healthcare organizations meet their ongoing training, education, assessment, competency management, and compliance needs. We provide our solutions to a wide range of customers within the healthcare industry.

HealthStream Workforce Development Solutions—Within HealthStream Workforce Development Solutions, we bring training, assessment, talent development, and talent management solutions together with administrative and management tools on our platform through our HLC, HCC, and HPC. We also offer a more streamlined version of the HLC, HealthStream Express™, along with HealthStream Connect, a content delivery platform that is designed for the singular purpose of allowing access to our extensive content libraries. These content libraries allow our customers to subscribe to a wide array of additional courseware. Additionally, medical device companies can offer online training support through our platform’s Inservice Center capability for their products and sponsor continuing education directly to healthcare workers.

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Our workforce development solutions support healthcare administrators in configuring training to meet the specific needs of various groups of employees, modifying training materials, documenting training completion, and facilitating competency assessments, and performance appraisals. As of December 31, 2013, we had approximately 3.71 million total subscribers for our subscription-based solutions, which include 3.39 million subscribers already implemented and 316,000 subscribers in the process of implementation. Our subscription-based solutions include subscriptions to our platform applications, plus courseware and content subscriptions. Pricing for the HLC, HCC, and HPC are subscription based, with fees based on the number of subscribers, courseware provided, and other factors. We offer training, implementation, and account management services to facilitate adoption of our subscription-based solutions. Fees for training are based on the time and efforts of the personnel involved. Implementation fees vary based on the size, scope, and complexity of the project. Our SaaS-based platform and subscription-based solutions are hosted in a central data center that allows authorized subscribers Internet access to our services, thereby eliminating the need for onsite local implementations of installed workforce development products.

Other Applications on our Platform—In addition to the HLC, we offer an array of other applications on our platform, each serving a unique function for hospitals and health systems. Each application on our platform is SaaS-based and has its own value proposition and revenue stream.

• The Authoring Center is a platform application that provides healthcare organizations the capability to create Internet-based courses by moving their existing course material online or self-authoring new material and electively sharing these materials with our other customers through a courseware exchange. We also offer Authoring Pro, an upgraded product which includes a licensed image library, as an additional subscription to this product. Team Author, a collaborative authoring application, was launched in 2012. Pricing for these products is subscription based, with fees based on the number of subscribers and level of penetration of services within the customer organization.

• The HealthStream Competency Center™ (HCC) is our SaaS-based platform application for competency management for healthcare organizations, which provides customers tools to assess competency and appraise performance. Competency assessment is a requirement of hospitals and healthcare organizations for maintaining accreditation based on requirements from The Joint Commission to evaluate, document, and report performance competencies. We believe that the HCC offers an effective means of determining which competencies are associated with each position and evaluating and documenting competency assessments.

• The HealthStream Performance Center™ (HPC) is our SaaS-based platform application for performance management for healthcare organizations, which provides an automated, paperless performance appraisal process. The HPC was launch in March of 2012. We believe the HPC offers an effective means of streamlining the performance appraisal process, which tends to increase completion rates and consistency with all aspects of hospitals’ workforce appraisal processes.

• SimCenter^®—is a suite of applications. We formed a collaborative arrangement, SimVentures, with Laerdal Medical in 2010 to offer products and services aimed at accelerating the global adoption of simulation-based learning by healthcare providers with a focus on improving clinical competencies and patient outcomes. The venture offers healthcare organizations and medical and nursing schools worldwide a range of fully integrated SaaS applications that accelerate development and distribution of simulation content; enable enterprise-wide management of simulation centers, simulators, and programs; and support assessment of the effectiveness of simulation training as part of complete curricula. SimStore^®, one segment of our collaborative arrangement with Laerdal, began operations in the first quarter of 2011 and our simulation management platform, SimManager, was launched in early 2012. SimView, our debriefing system for simulation-based training, also was launched in early 2012.

HealthStream Research/Patient Experience Solutions—HealthStream Research/Patient Experience Solutions complements HealthStream Workforce Development Solutions product and service offerings by providing hospital-based customers with Patient Insights™, Employee Insights™, Physician Insights™, and Community Insights™ surveys, data analyses of survey results, and other research-based measurement tools. Our services are designed to provide thorough analyses with insightful recommendations for change; benchmarking capability using our comprehensive databases; and consulting services to identify solutions for our customers based on their survey results. Clients are able to access and analyze their survey results data through Insights Online™, our secure web-based reporting platform. Our survey and research solutions focus on providing statistically valid data to assist our customers with their decision making related to their organization’s performance improvement objectives. In addition to collecting and reporting data, we provide analysis and consulting to help customers understand and improve their survey results and patient experiences and the underlying impact on their business. It is with this insight that healthcare organizations are able to develop plans for enhanced performance that can be delivered through our learning solutions. Pricing for these services is based on the survey type, delivery method, size of the survey instrument, sample size, frequency of survey cycles, and other factors.

BUSINESS COMBINATIONS

We acquired Decision Critical, Inc. (DCI) in June 2012, Sy.Med Development, Inc. (Sy.Med) in October 2012, and substantially all of the assets of Baptist Leadership Group (BLG) in September 2013. For additional information regarding these acquisitions, please see Note 5 of the Consolidated Financial Statements and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report.

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CUSTOMERS

We provide our solutions to customers across a broad range of entities within the healthcare industry, including healthcare organizations (including government entities) and pharmaceutical and medical device companies. We derive a substantial portion of our revenues from a relatively small number of customers, although no single customer represented more than 10 percent of our revenues during 2013, 2012, or 2011. Examples of customers that have purchased or contracted for products and services from HealthStream include: HCA, Inc., Tenet Healthcare Corporation, Catholic Health Initiatives, Community Health Systems, Inc., Lifepoint Hospitals, Inc., and Ardent Health Services, LLC.

SALES AND MARKETING

We market our products and services primarily through our direct sales teams, our consultants, and our account relationship managers, who are based at our corporate headquarters in Nashville, Tennessee and in our additional offices located in Laurel, Maryland, Brentwood, Tennessee, and Pensacola, Florida as well as remote home office sales locations. As of December 31, 2013, our HealthStream Workforce Development Solutions sales and relationship management personnel consisted of 93 employees—of which 86 carried sales quotas—and our HealthStream Research/Patient Experience Solutions sales and relationship management personnel consisted of 27 employees—of which 15 carried sales quotas. Our geographically dispersed field sales organization is divided into teams focused on selling our workforce development products and a separate sales team focused on selling our research and patient experience improvement products.

We conduct a variety of marketing programs to promote our products and services, including product catalogs, user groups—including our annual customer Summit, trade shows, internet promotion and demonstrations, telemarketing campaigns, public relations, distribution of product-specific literature, direct mail, and advertising.

Over most of the last twelve years, we have hosted an annual conference in Nashville for our customers known as the “Summit.” We have utilized this client conference to reach out to existing and potential customers and business partners, provide training and educational services, and to demonstrate our new and existing product offerings. We have marketing teams that are responsible for these initiatives and for working with and supporting our product management and sales teams. At December 31, 2013, our marketing personnel consisted of 19 employees.

OPERATIONS

We believe our ability to establish and maintain long-term customer relationships, adoption of our products and services, recurring sales, and development and maintenance of new and existing products are dependent on the strength of our operations, customer service, product development and maintenance, training, and other support teams. As of December 31, 2013, these personnel consisted of approximately 192 employees for our Workforce Development Solutions segment and approximately 302 employees for our Research/Patient Experience Solutions segment, of which 175 employees worked in our interviewing center. Our Workforce Development Solutions operations team consists of personnel associated with customer support, implementation services, product development and maintenance, training, and project management. Our Research/Patient Experience Solutions operations team consists of personnel associated with phone interviewing, distributing and processing paper-based survey instruments, patient experience coaching and consulting, data analysis and reporting of survey results, and project management.

TECHNOLOGY MANAGEMENT

Our services are designed to be reliable, secure, and scalable. Our software is a combination of proprietary and commercially available software and operating systems. Our software supports hosting and management of content, publication of our web sites, execution of courseware, registration and tracking of users, collection, sampling, and analysis of survey data, and reporting of information for both internal and external use. We designed the platforms that provide our services to allow each component to be independently scaled by adding commercially available hardware and a combination of commercially available and proprietary software components.

Our software applications, servers, and network infrastructure that deliver the majority of our services are hosted by third-party data center providers. Our primary data center is located at a tier-four rated hosting facility in Chicago, Illinois, and our disaster recovery data center is hosted by a separate provider located in Franklin, Tennessee. Both of our providers maintain our equipment in secure, limited access environments, supported by redundant power, environmental conditioning, and network connectivity. Our providers’ hosting centers are connected to the Internet through multiple, redundant, high-speed fiber optic circuits. The transactional systems supporting the data collection for our survey products are located in secure, limited access environments located at our Nashville, Tennessee and Laurel, Maryland offices and feed our core business intelligence platforms supporting our survey products located at our primary hosting facility in Chicago. Company personnel monitor all servers, networks, and systems on a continuous basis. Together with our providers, we employ several levels of enterprise firewall systems and data abstraction to protect our databases, customer information, and courseware library from unauthorized access. All of our production data located in our Chicago data center is backed up in real time to our disaster recovery data center located in Franklin, Tennessee. Monthly snap-shots of our data are stored off-site with a third-party data storage provider.

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COMPETITION

In addition to the competing healthcare education delivery methods in the industry, we also have direct competitors. In the workforce development business, a number of companies offer competitive learning management products and talent management modules to the healthcare industry. We compete with companies such as Cornerstone OnDemand, Healthcare Source, Oracle, SABA, SAP, and SumTotal Systems that provide their services to multiple industries, including healthcare. During 2012, SAP and Oracle gained greater presence in the healthcare market by way of acquisitions; SAP acquired SuccessFactors and Oracle acquired TALEO. We also compete with large medical publishers that have operating units that offer learning management systems that focus on healthcare, such as Reed Elsevier Group’s MC Strategies. In the healthcare research business, we see competition from large nationally recognized research firms such as Avatar International, Gallup, National Research Corporation, Press Ganey Associates, Studer Group, Professional Research Consultants, Inc., and others. Our research business also experiences direct competition from vendors who provide research services to other industries including Kenexa, which is now owned by IBM, and Foresight, which is now owned by TNS Global. Finally, in our simulation business, we compete with B-Line Medical, CAE/Meti, and EMS.

We believe our workforce development solutions, which include both products and services that facilitate training, assessment and development for healthcare professionals, a wide assortment of courseware, a mechanism for measuring satisfaction and/or other results, and the ability to provide all our services on a single platform over the Internet, provide us with a competitive advantage. In our research business, we believe our large proprietary database of survey results, technology infrastructure designed to automate the processing of survey results, proprietary core survey instruments and action plan development methodology, and our ability to quickly deliver relevant online courseware targeted at addressing survey related findings provide us with a competitive advantage. In our simulation business, our SimCenter^TM products enable simulation centers to purchase courseware online, manage students and resources, and provide a debriefing capability in an integrated manner. Built on our SaaS-based platform and with our collaborative arrangement with Laerdal Medical, a world leader in simulation equipment, we believe we have a competitive advantage in this area. We believe that the principal competitive factors affecting the marketing of our workforce development and research solutions to the healthcare industry include:

• features of our SaaS-based platform and applications, including reporting, management functionality, ability to manage a variety of events or modalities, courseware assignment, curriculum management, documenting competency assessments and performance appraisals, scalability, and the ability to track utilization and results;

• scope and variety of Internet-based learning courseware available, including mandated content for OSHA, The Joint Commission, patient safety, and HIPAA requirements, ICD-10 training, competency-based content, courseware scenarios that drive simulators, courseware that provides CPR certification, as well as the ability of our customers to create and host their own web-enabled courseware;

• our singular focus on the healthcare industry and our deep healthcare expertise;

• scope and quality of professional services offered, including survey execution, implementation, benchmarking, training and the expertise and technical knowledge of the customers’ employees;

• competitive pricing, which supports a return on investment to customers when compared to other alternative delivery methods;

• customer service and support;

• effectiveness of sales and marketing efforts; and

• company reputation.

Collectively, we believe these capabilities provide us with the ability to improve the quality of healthcare by assessing and developing the people who deliver care.

GOVERNMENT REGULATION OF THE INTERNET AND THE HEALTHCARE INDUSTRY

Regulation of the Internet and the Privacy and Security of Personal Information

The laws and regulations that govern our business change rapidly. For example, the United States government and the governments of some states and foreign countries have attempted to regulate activities on the Internet. The following are some of the evolving areas of law that are relevant to our business:

• Privacy and Security Laws. Current and proposed federal, state and foreign privacy and security regulations and other laws restricting the collection, use, security and disclosure of personal information could limit our ability to collect information or use and disclose the information in our databases or derived from other sources to generate revenues. It may be costly to implement security or other measures designed to comply with any new legislation. For example, the American Recovery and Reinvestment Act of 2009 (ARRA) expanded the application of certain HIPAA privacy and security requirements to apply directly to us as a business associate of our customers. On January 25, 2013, the United States Department of Health and Human Services (HHS) issued implementing regulations, and compliance was generally required beginning September 23, 2013.

• Content Regulation. Both foreign and domestic governments have adopted and proposed laws governing the content of material transmitted over the Internet. These include laws relating to obscenity, indecency, libel and defamation. We could be liable if content delivered by us violates these regulations.

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• Information Security Accountability Regulation. As a business associate of our customers, we are required to report certain breaches of protected health information to our customers, which must in turn notify affected individuals, HHS and, in certain situations involving large breaches, the media. The 2013 HHS regulations created a presumption that all non-permitted uses or disclosures of unsecured, protected health information are breaches unless the covered entity or business associate establishes that there is a low probability the information has been compromised. In addition, we are subject to certain state laws that relate to privacy or the reporting of security breaches. For example, California law requires notification of security breaches involving personal information and medical information. We may incur costs to comply with these security requirements. Because many of these laws are new and there is little guidance related to many of these laws, it is difficult to estimate the cost of our compliance with these laws. Further, Congress has considered bills that would require companies to engage independent third parties to audit the companies’ computer information security. If the Company is required to report a breach of security or if one of the Company’s customers is required to report a breach of security by the Company, the Company’s business could be negatively impacted.

• Sales and Use Tax. Through December 31, 2013, we collected sales, use or other taxes on taxable transactions in states in which we have employees or have a significant level of sales activity. While HealthStream expects that this approach is appropriate, other states or foreign jurisdictions may seek to impose tax collection obligations on companies like us that engage in online commerce. If they do, these obligations could limit the growth of electronic commerce in general and limit our ability to profit from the sale of our services over the Internet.

Laws and regulations directly applicable to content regulation, e-commerce, Internet communications, and the privacy and security of personal information are becoming more prevalent. Congress continues considering laws regarding Internet taxation. The dynamic nature of this regulatory environment increases the uncertainty regarding the marketplace impact of such regulation. The enactment of any additional laws or regulations may increase our cost of conducting business or otherwise harm our business, financial condition and operating results.

Regulation of Education, Training and Other Services for Healthcare Professionals

Occupational Safety and Health Administration (OSHA). OSHA regulations require employers to provide training to employees to minimize the risk of injury from various potential workplace hazards. Employers in the healthcare industry are required to provide training with respect to various topics, including blood borne pathogens exposure control, laboratory safety and tuberculosis infection control. OSHA regulations require employers to keep records of their employees’ completion of training with respect to these workplace hazards.

The Joint Commission. The Joint Commission mandates that employers in the healthcare industry provide certain workplace safety and patient interaction training to employees. Training required by The Joint Commission may include programs on infection control, patient bill of rights, radiation safety, and incident reporting. Healthcare organizations are required to provide and document training on these topics to receive accreditation from The Joint Commission. In addition, The Joint Commission imposes continuing education requirements on physicians that relate to each physician’s specific staff appointments.

Health Insurance Portability and Accountability Act (HIPAA). HIPAA regulations require certain organizations, including most healthcare providers and health plans, to adopt safeguards regarding the use and disclosure of health-related information. HIPAA regulations also require these organizations to provide reasonable and appropriate safeguards to protect the privacy, integrity and confidentiality of individually identifiable healthcare information. These healthcare organizations are required to establish, maintain and provide training with regard to their policies and procedures for protecting the integrity and confidentiality of individually identifiable healthcare information. Healthcare organizations are required to document training on these topics to support their compliance. ARRA expanded the application of certain HIPAA privacy and security requirements to apply directly to companies (known as business associates) that provide services to certain healthcare organizations, and revised the requirements for agreements with business associates. Under the regulations that implement these ARRA requirements, business associates and their subcontractors may be directly subject to criminal and civil sanctions for violations of HIPAA privacy security standards.

The American Nurses Credentialing Center (ANCC). ANCC, a subsidiary of the American Nurses Association (ANA), provides individuals and organizations throughout the nursing profession with the resources they need to achieve practice excellence. ANCC’s internationally renowned credentialing programs certify nurses in specialty practice areas; recognize healthcare organizations for promoting safe, positive work environments through the Magnet Recognition Program^® and the Pathway to Excellence^® Program; and accredit providers of continuing nursing education. In addition, ANCC’s Institute for Credentialing Innovation^® offers an array of informational and educational services and products to support its core credentialing programs. ANCC certification exams validate nurses’ skills, knowledge, and abilities. More than a quarter million nurses have been certified by ANCC since 1990. More than 80,000 advanced practice nurses are currently certified by ANCC. The ANCC Magnet Recognition Program^® recognizes healthcare organizations that provide the very best in nursing care and professionalism in nursing practice. The program also provides a vehicle for disseminating best practices and strategies among nursing systems. The ANCC Magnet Recognition Program is the gold standard for nursing excellence. The Pathway to Excellence^® Program recognizes the essential elements of an optimal nursing practice environment. The designation is earned by healthcare organizations that create work environments where nurses can flourish. The award substantiates the professional satisfaction of nurses and identifies best places to work.

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Continuing Nursing Education (CNE). State nurse practice laws are usually the source of authority for establishing the state board of nursing requirements. The state board of nursing establishes the state’s CNE requirements for professional nurses. CNE credits are provided through accredited providers that have been approved by the ANCC Commission on Accreditation and/or the state board of nursing. CNE requirements vary widely from state to state. Thirty-four states require registered nurses to certify that they have accumulated a minimum number of CNE credits in order to maintain their licenses. In some states, the CNE requirement only applies to re-licensure of advance practice nurses, or additional CNEs may be required of this category of nurses. Required CNE ranges from 12 to 45 credits annually, with reporting generally on a bi-annual basis. Board certifications (e.g., CNOR – certification of perioperative nursing) also require CNE credits, with certain percentages required in specific categories based on the certification type. We are an accredited provider of CNE by the ANCC.

Continuing Medical Education (CME). State licensing boards, professional organizations and employers require physicians to certify that they have accumulated a minimum number of continuing medical education hours to maintain their licenses. Generally, each state’s medical practice laws authorize the state’s board of medicine to establish and track CME requirements. Forty-eight state medical licensing boards currently have CME requirements, as well as Puerto Rico, Guam, and the U.S. Virgin Islands. The number of CME hours required by each state ranges from 15 to 50 hours per year. Other sources of CME requirements are state medical societies and practice specialty boards. The failure to obtain the requisite amount and type of CME could result in non-renewal of the physician’s license to practice medicine and/or membership in a medical or practice specialty society. American Medical Association (AMA) classifies continuing medical education activities as either Category 1, which includes formal CME activities, or Category 2, which includes most informal activities. Sponsors can only designate CME activities for AMA PRA Category 1 Credit™. Most agencies nationwide that require CME participation specify AMA PRA Category 1 Credit™. Only institutions and organizations accredited to provide CME can designate an activity for AMA PRA Category 1 Credit™. The Accreditation Council for Continuing Medical Education (ACCME) is responsible for awarding accreditation status to state medical societies, medical schools, and other institutions and organizations that provide CME activities for a national audience of physicians. Only institutions and organizations are accredited. State medical societies, operating under the aegis of the ACCME, accredit institutions and organizations that provide CME activities primarily for physicians within the state or bordering states. We are an accredited provider of CME by the ACCME.

Centers for Medicare & Medicaid Services (CMS). CMS has articulated a vision for health care quality—the right care for every person every time. To achieve this vision, CMS is committed to care that is safe, effective, timely, patient-centered, efficient, and equitable. Value-based purchasing (VBP), which links payment more directly to the quality of care provided, is a strategy that can help to transform the current payment system by rewarding providers for delivering high quality, efficient clinical care. Through a number of public reporting programs, demonstration projects, pilot programs, and voluntary efforts, CMS has launched VBP initiatives in hospitals, physician offices, nursing homes, home health services, and dialysis facilities. Further, pursuant to the Patient Protection and Affordable Care Act, as amended by the Healthcare and Education Reconciliation Act of 2010 (collectively, ACA), CMS is implementing a number of initiatives designed to link payments to quality and efficiency, including a VBP program for inpatient hospital services.

Consumer Assessment of Healthcare Providers and Systems (CAHPS). CMS has partnered with AHRQ to develop a standardized survey instrument and data collection methodology for measuring patients’ perspectives on hospital care. The intent of the survey is to produce comparable data on the patients’ perspectives to allow consumer-based comparisons between hospitals, align incentives to drive hospitals to improve their quality of care, and increase the transparency of hospital reporting. Hospitals must submit data for certain required quality measures—which for inpatients includes the CAHPS^® Hospital Survey—in order to receive the full market basket increase to their reimbursement payment rates from CMS. While hospital participation is voluntary, hospitals that fail to submit this survey data will incur a reduction of two percentage points in the inpatient market basket update amount for the following federal fiscal year. We have received certified vendor designation and will continue to offer CAHPS^® Hospital Survey services. In addition, we are a certified vendor approved to offer CAHPS^® Home Health Care Survey used to measure the experiences of people receiving home health care from Medicare-certified home health agencies. We also offer CAHPS^® Clinician and Group Survey used to measure patient experiences with health care providers and staff in doctor’s offices.

Medicare and Medicaid Electronic Health Records (EHR) Incentive Programs. The Medicare and Medicaid EHR Incentive Programs provide incentive payments to eligible professionals, eligible hospitals and critical access hospitals (CAHs) as they adopt, implement, upgrade or demonstrate meaningful use of certified EHR technology. By putting into action and meaningfully using an EHR system, providers will reap benefits beyond financial incentives–such as reduction in errors, availability of records and data, reminders and alerts, clinical decision support, and e-prescribing/refill automation.

Allied Disciplines. Various allied health professionals are required to obtain continuing education to maintain their licenses. For example, emergency medical services personnel may be required to acquire up to 20 continuing education hours per year, all or a portion of which can be fulfilled online. These requirements vary by state and depend on the classification of the employee.

Other Continuing Education. We are also an accredited provider of continuing education and continuing pharmacy education by the Association of Surgical Technologists, Inc. (AST) and the Accreditation Council for Pharmacy Education (ACPE), respectively.

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Regulation of Educational Program Sponsorship and Support

There are a variety of laws and regulations that affect the relationships between our medical device and pharmaceutical customers and the users of our products and services, including the sponsorship and support of educational programs. For example, The Physician Payment Sunshine Act (“Sunshine Act”) requires manufacturers of drugs, biological devices and medical devices covered by Medicare, Medicaid, or the Children’s Health Insurance Program to report annually to CMS payments and other transfers of value, including educational programs, given by such manufacturers to physicians and teaching hospitals, with limited exceptions. CMS has issued a final rule implementing the Sunshine Act. Manufacturers are required to report the physician’s name, business address and national provider identifier as well as other information including the value, date, form and nature of what is offered. Manufacturers subject to the rule were required to begin collecting information beginning August 1, 2013, with the first reporting deadline set for March 31, 2014. CMS will release the 2013 reported data on a public website by September 30, 2014. Manufacturers that do not meet the reporting obligations will be subject to significant monetary penalties.

Further, the Office of Inspector General (OIG) has issued Compliance Program Guidance for Pharmaceutical Manufacturers and for the Durable Medical Equipment, Prosthetics, Orthotics, and Supply Industry (collectively, the Guidelines). The Guidelines address compliance risks raised by the support of continuing educational activities by pharmaceutical and medical device companies. The Guidelines have affected and may continue to affect the type and extent of commercial support we receive for our continuing education activities. The trade associations for the pharmaceutical and medical device industries (PhRMA and AdvaMed, respectively) have also promulgated their own codes of ethics that further restrict the interactions between industry and health care professionals. In addition, the AMA has established its own code of ethics regarding Gifts to Physicians from Industry to provide standards of conduct for the medical profession. The Company follows the rules and guidelines provided by ACCME, ANCC, and other continuing education accrediting bodies to ensure that its continuing education programming is free from commercial bias and consistent with the Guidelines.

The U.S. Food and Drug Administration (FDA) and the Federal Trade Commission (FTC)

Current FDA and FTC rules and enforcement actions and regulatory policies or those that the FDA or the FTC may develop in the future could have a material adverse effect on our ability to provide existing or future applications or services to our end users or obtain the necessary corporate sponsorship to do so. The FDA and the FTC regulate the form, content and dissemination of labeling, advertising and promotional materials, including direct-to-consumer prescription drug and medical device advertising, prepared by, or for, pharmaceutical, biotechnology or medical device companies. The FTC regulates over-the-counter drug advertising and, in some cases, medical device advertising. Generally, regulated companies must limit their advertising and promotional materials to discussions of the FDA-approved claims and, in limited circumstances, to a limited number of claims not approved by the FDA. Therefore, any information that promotes the use of pharmaceutical or medical device products that is presented with our services is subject to the full array of the FDA and FTC requirements and enforcement actions. We believe that banner advertisements, sponsorship links and any educational programs that lack independent editorial control that we may present with our services could be subject to FDA or FTC regulation. While the FDA and the FTC place the principal burden of compliance with advertising and promotional regulations on the advertiser, if the FDA or FTC finds that any regulated information presented with our services violates FDA or FTC regulations, they may take regulatory action against us or the advertiser or sponsor of that information. In addition, the FDA may adopt new regulatory policies that more tightly regulate the format and content of promotional information on the Internet.

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

To protect our proprietary rights, we rely generally on copyright, trademark and trade secret laws; confidentiality agreements and procedures with employees, consultants and other third parties; contractual provisions in license agreements with consultants, vendors and customers; and use measures designed to control access to our software, documentation and other proprietary information. We own federal trademark and service mark registrations for several marks, including without limitation “EXCELLENCE THROUGH INSIGHT’, “HEALTHSTREAM”, “HOSPITAL DIRECT”, “OR PROTOCOL”, “PATIENT INSIGHTS”, “PHYSICIAN INSIGHTS”, “INSIGHTS ONLINE”, “INSIGHT INTO ACTION”, “QUALITY CHECK”, “SIMCENTER”, “SIMMANAGER”, and “SIMSTORE.” We also have obtained registration of the “HEALTHSTREAM” mark in certain other countries. Applications for several trademarks are currently pending. However, there can be no assurance that we will be successful in obtaining registration of other trademarks for which we have applied.

The courseware that we license to our customers is developed through a combination of license agreements with publishers and authors, assignments and work-for-hire arrangements with third parties, and development by employees. We require publishers, authors and other third parties to represent and warrant that their content does not infringe on or misappropriate any third-party intellectual property rights and that they have the right to provide their content and have obtained all third-party consents necessary to do so. Our publishers, authors and other third parties also agree to indemnify us against certain liability we might sustain due to the content they provide.

If a third party asserts a claim that we have infringed its patents or other intellectual property right, we may be required to redesign our products or enter into royalty or licensing agreements. In addition, we license technologies from third parties for incorporation into our services. Royalty and licensing agreements with these third parties may not be available on terms acceptable to us, if at all. Additionally, despite the steps we have taken to protect our intellectual property and proprietary rights, our efforts may not be adequate. Third parties may infringe or misappropriate our intellectual property, and such violations of our intellectual property are difficult to detect and police. Competitors may also independently develop technologies that are substantially equivalent or superior to the technologies we employ in our products or services. If we fail to protect our proprietary rights adequately, our competitors could offer similar services, potentially significantly harming our competitive position and decreasing our revenues.

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AVAILABLE INFORMATION

The Company files reports with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and other reports from time to time. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company is an electronic filer and the SEC maintains an Internet site at http://www.sec.gov that contains the reports, proxy and information statements, and other information filed electronically. Our website address is www.healthstream.com. Please note that our website address is provided as an inactive textual reference only. We make available free of charge through our website, the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The information provided on our website is not part of this report, and is therefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this report.

OUR EMPLOYEES

As of December 31, 2013, we employed 598 full-time and 88 part-time persons, of which 175 persons are employed in our interviewing center. Our success will depend in large part upon our ability to attract and retain qualified employees. We face competition in this regard from other companies, but we believe that we maintain good relations with our employees. We are not subject to any collective bargaining agreements.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following is a brief summary of the business experience of each of the executive officers of the Company. Officers of the Company are elected by the Board of Directors and serve at the pleasure of the Board of Directors. The following table sets forth certain information regarding the executive officers of the Company:

Name	Age	Position
Robert A. Frist, Jr.	46	Chief Executive Officer, President and Chairman of the Board of Directors
Jeffrey S. Doster	49	Senior Vice President and Chief Technology Officer
Gerard M. Hayden, Jr.	59	Senior Vice President and Chief Financial Officer
Arthur E. Newman	65	Executive Vice President
J. Edward Pearson	51	Senior Vice President and Chief Operating Officer
Michael Sousa	45	Senior Vice President

Robert A. Frist, Jr., one of our co-founders, has served as our chief executive officer and chairman of the board of directors since 1990 and president since 2001. Mr. Frist is the company’s chief operating decision maker. He graduated with a Bachelor of Science in business with concentrations in finance, economics and marketing from Trinity University.

Jeffrey S. Doster joined the Company in May 2008 as senior vice president and chief technology officer. He earned undergraduate degrees in both Economics and Business Administration from Towson University, as well as a Master of Business Administration from Loyola College, in Maryland.

Gerard M. Hayden, Jr. joined the Company as senior vice president and chief financial officer in May 2008. He earned a Bachelor of Arts from the University of Notre Dame and a Master of Science from Northeastern University.

Arthur E. Newman joined the Company in January 2000, and is currently our Executive Vice President. Previously he served as our chief financial officer and senior vice president from January 2000 to March 2006. He holds a Bachelor of Science in chemistry from the University of Miami and a Master of Business Administration from Rutgers University.

J. Edward Pearson joined the Company in June 2006 as senior vice president, responsible for our survey and research business and was named president of HealthStream Research™ during 2007 and Chief Operating Officer in 2011. He earned a Bachelor of Business Administration in accounting from Middle Tennessee State University.

Michael Sousa joined the company in October 2004, and was promoted to senior vice president in January 2010. He previously served as vice president for the Company, with responsibilities for our strategic accounts program. He earned a Bachelor of Science degree from Boston College and a Master of Business Administration from Boston University.

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Item 1A. Risk Factors

We believe that the risks and uncertainties described below and elsewhere in this document are the principal material risks facing the Company as of the date of this report. In the future, we may become subject to additional risks that are not currently known to us. Our business, financial condition or results of operations could be materially adversely affected by any of the following risks and by any unknown risks. The trading price of our common stock could decline due to any of the following risks or any unknown risks.

Risks Related to Our Business Model

We may be unable to effectively execute our growth strategy which could have an adverse effect on our business and competitive position in the industry.

Our business strategy includes increasing our market share and presence through sales to new customers, additional sales to existing customers, introductions of new products and services, and maintaining strong relationships with our existing customers. Some of the risks that we may encounter in executing our growth strategy include:

• expenses, delays and difficulties of identifying and developing new products or services and integrating such new products or services into our existing organization;

• inability to leverage our operational and financial systems sufficiently to support our growth;

• inability to generate sufficient revenue from new products to offset investment costs;

• inability to effectively identify, manage and exploit existing and emerging market opportunities;

• inability to maintain our existing customer relationships;

• increased competition from new and existing competitors;

• lengthy sales cycles, or customers delaying purchasing decisions due to economic conditions;

• reduced spending within the training, information and education departments of hospitals within our target market; and

• failure of the market for training, information and education in the healthcare industry to grow to a sufficient size or at a sufficient rate.

If any of these risks are realized, our business, and our competitive position in the industry, could suffer.

We may be unable to effectively identify, complete or integrate the operations of future acquisitions, joint ventures, collaborative arrangements or other growth investments.

As part of our growth strategy, we actively review possible acquisitions, joint ventures, collaborative arrangements or growth investments that complement or enhance our business. We may not be able to identify, complete or integrate the operations of future acquisitions, joint ventures, collaborative arrangements or other growth investments. In addition, if we finance acquisitions, joint ventures, collaborative arrangements or other growth initiatives by issuing equity securities, our existing shareholders may be diluted which could affect the market price of our stock. As a result, if we fail to properly evaluate and execute acquisitions and investments, our business prospects may be seriously harmed. Some of the risks that we may encounter in implementing our acquisition, joint venture, collaborative arrangement or growth investment strategies include:

• expenses, delays or difficulties in identifying and integrating acquired companies or joint venture operations, collaborative arrangements or other growth investments into our organization;

• inability to retain personnel associated with acquisitions, joint ventures, collaborative arrangements or other growth investments;

• diversion of management’s attention from other initiatives and/or day-to-day operations to effectively execute our growth strategy; and

• inability to generate sufficient revenue, profit, and cash flow from acquisitions, joint ventures, collaborative arrangements or other growth investments to offset our investment costs.

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Our ability to accurately forecast revenue for certain products and services may be hindered by customer scheduling.

As revenues from our subscription business continue to increase, a larger portion of our revenues will be predictable; however, quarterly performance may be more subject to fluctuations. Our HealthStream Research/Patient Experience Solutions products and services are typically contracted by healthcare organizations for multi-year terms, but the frequency, sample size, and timing of survey cycles can vary from quarter to quarter and year to year. The contract structure for some Research/Patient Experience Solutions products gives customers latitude about when to initiate a survey, which can affect quarterly or annual revenue forecasts. Also, other project-based products, such as certain content development, and professional services, are subject to the customers’ involvement in the provision of the product or service. The timing and magnitude of these project-based product and service contracts may vary widely from quarter to quarter and year to year, and thus may affect our ability to accurately forecast quarterly and annual financial performance.

Our ability to accurately forecast revenue may be affected by lengthy and widely varying sales cycles.

The period from our initial contact with a potential customer and their first purchase of our solution typically ranges from three to nine months, and in some cases has extended much further. The range in the sales cycle can be impacted by multiple factors, including an increasing trend towards more formal request for proposal processes and more competition within our industry, as well as formal budget timelines which impact timing of purchases by target customers. New products tend to have a longer and more unpredictable revenue ramp period. As a result of these factors, we have only limited ability to forecast the timing and type of initial sales. This, in turn, makes it more difficult to forecast quarterly and annual financial performance.

We may not be able to maintain our competitive position against current and potential competitors, especially those with significantly greater financial, technical, marketing, or other resources.

Several of our competitors and many potential competitors have longer operating histories and significantly greater financial, technical, marketing, or other resources than we do. We encounter direct competition from both large and small e-learning companies and other companies focused on workforce development management in the healthcare industry. We also face competition from larger survey and research companies. Given the profile and growth of the healthcare industry and the growing need for education, training, simulation, research, and information, it is likely that additional competitors will emerge. We believe we maintain a competitive advantage against our competitors by offering a comprehensive array of products and services; however, our lack of market diversification resulting from our concentration on the healthcare industry may make us susceptible to losing market share to our competitors who also offer a complete e-learning solution to a cross-section of industries. These companies may be able to respond more quickly than we can to new or changing opportunities, technologies, standards or customer requirements. Further, most of our customer agreements are for terms ranging from one to four or five years, with no obligation to renew. The short terms of these agreements may enable customers to more easily shift to one of our competitors.

The failure to maintain and strengthen our relationships with strategic partners or significant changes in the terms of the agreements we have with them may have an adverse impact on our ability to successfully market our products and services.

We have entered into contracts with strategic partners, including content, technology, and retail channel vendors. Our ability to increase the sales of our products and services depends in part upon maintaining and strengthening relationships with these current and future strategic partners. Most of these contracts are on a non-exclusive basis. Certain strategic partners may offer products and services from multiple distinct companies, including, in some instances, products or services which may compete with our products and services. Moreover, under contracts with some of our strategic partners, we may be bound by provisions that restrict our ability to market and sell our products and services to certain potential customers. The success of these contractual arrangements will depend in part upon the strategic partners’ own competitive, marketing, and strategic considerations, including the relative advantages for such strategic partners in using alternative products being developed and marketed by them or our competitors, rather than our products and services.

We cannot guarantee that we will be able to maintain and strengthen our relationships with strategic partners, that we will be successful in effectively integrating such partners’ products and technology into our own, or that such relationships will be successful in generating additional revenue. If any of these strategic partners have negative experiences with our products and services, or seek to amend the financial or other terms of the contracts we have with them, we may need to increase our organizational focus on the types of services and solutions they sell and alter our development, integration, and/or distribution strategies, which may divert our planned efforts and resources from other projects.

Lastly, we could be subject to claims and liability, as a result of the activities, products, or services of these strategic partners, and/or our acts or omissions with regard to these strategic partners. Even if these claims do not result in liability to us, investigating and defending these claims could be expensive, time-consuming and result in suspension of or interference with certain offerings to our clients and/or adverse publicity that could harm our business.

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We may not be able to retain proper distribution rights from our content partners, and this could affect projected growth in courseware subscription revenue.

Most of our agreements with content providers are for initial terms of two to three years. The content partners may choose not to renew their agreements with us or may terminate the agreements early if we do not fulfill our contractual obligations. If a significant number of our content providers terminate or fail to renew their agreements with us on acceptable terms, it could result in a reduction in the number of courses we are able to distribute, causing decreased revenues. Most of our agreements with our content partners are non-exclusive, and our competitors offer, or could offer, training and continuing education content that is similar to or the same as ours. If publishers and authors, including our current content partners, offer information to users or our competitors on more favorable terms than those offered to us, or increase our license fees, our competitive position and our profit margins and prospects could be harmed. In addition, the failure by our content partners to deliver high-quality content and to revise their content in response to user demand and evolving healthcare advances and trends could result in customer dissatisfaction and inhibit our ability to attract and retain subscribers of our courseware offerings.

We may not be able to develop new products and services, or enhancements to our existing products and services, or be able to achieve widespread acceptance of new products, services or features, or keep pace with technological developments.

Our growth strategy depends in part on our ability to generate revenue growth through sales to new customers as well as increasing sales of additional courseware subscriptions and other products and services to existing customers. Our identification of additional features, content, products and services may not result in timely development of complementary products. In addition, the success of certain new products and services may be dependent on continued growth in our base of SaaS-based customers and we are not able to accurately predict the volume or speed with which existing and new customers will adopt such new products and services. Because healthcare training continues to change and evolve, we may be unable to accurately predict and develop new products, features, content and other products to address the needs of the healthcare industry. Further, the new products, services and enhancements we develop may introduce significant defects into or otherwise negatively impact our core software platform. While all new products and services are subject to testing and quality control, all software and software-based services are subject to errors and malfunctions. If we release new products, services and/or enhancements with bugs, defects or errors or that cause bugs, defects or errors in existing products, it could result in lost revenues, reduced ability to meet contractual obligations and would be detrimental to our business and reputation. If new products, features, or content are not accepted or integrated by new or existing customers, we may not be able to recover the cost of this development and our financial performance will be harmed. Continued growth of our SaaS-based customer population is dependent on our ability to continue to provide relevant products and services in a timely manner. The success of our business will depend on our ability to continue providing our products and services as well as enhancing our courseware, product and service offerings that address the needs of healthcare organizations.

We may be unable to continue to license our third party software, on which a portion of our product and service offerings rely, or we may experience errors in this software, which could increase our costs and decrease our revenue.

We use technology components in some of our products that have been licensed from third parties. Future licenses to these technologies may not be available to us on commercially reasonable terms, or at all. The loss of or inability to obtain or maintain any of these licenses could result in delays in the introduction of new products and services or could force us to discontinue offering portions of our workforce development or research/patient experience solutions until equivalent technology, if available, is identified, licensed and integrated. The operation of our products would be impaired if errors occur in third party technology or content that we incorporate, and we may incur additional costs to repair or replace the defective technology or content. It may be difficult for us to correct any errors in third party products because the products are not within our control. Accordingly, our revenue could decrease and our costs could increase in the event of any errors in this technology. Furthermore, we may become subject to legal claims related to licensed technology based on product liability, infringement of intellectual property or other legal theories. Even if these claims do not result in liability to us, investigating and defending these claims could be expensive, time-consuming and result in suspension of or interference with certain offerings to our clients and/or adverse publicity that could harm our business.

Financial Risks

A significant portion of our revenue is generated from a relatively small number of customers.

We derive a substantial portion of our revenues from a relatively small number of customers. A termination of our agreements with any of our significant customers or a failure of these customers to renew their contracts on favorable terms, or at all, could have a material adverse effect on our business.

A significant portion of our business is subject to renewal each year. Therefore, renewals have a significant impact on our revenue and operating results.

For the year ended December 31, 2013, approximately 72% of our net revenue was derived from our subscription-based solution products. Our subscription-based customers have no obligation to renew their subscriptions for our products or services after the expiration of the subscription agreement, and in fact, some customers have elected not to renew their subscription. In addition, our customers may renew at a lower pricing or activity level. Historically, we have reported renewal rates of our core platform, the HLC, and during the year ended December 31, 2013, we renewed 97% of the annual HLC contract value up for renewal and 97% of the

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HLC subscribers which were up for renewal. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including but not limited to their dissatisfaction with our service, a dissipation or cessation of their need for one or more of our products or services, pricing or competitive product offerings. If we are unable to renew a substantial portion of the contracts that are up for renewal or maintain our pricing, our revenue could be adversely affected, which would have a material adverse affect on our results of operations and financial position. For example, the requirement mandated by CMS for healthcare organizations to transition to the ICD-10 coding system by October 2014 has generated significant demand for our ICD-10 training courseware. Subscriptions of ICD-10 courseware positively influenced the Company’s revenue and operating income during 2013, and are expected to do the same during 2014. As ICD-10 subscriptions begin to expire during 2014 and 2015, customers may choose not to renew their subscriptions on similar terms or at all, which could result in a revenue decline in 2015 compared to 2014. HealthStream Research/Patient Experience Solutions product and service contracts typically range from one to three years in length, and customers are not obligated to renew their contract with us after their contract expires. If our customers do not renew their arrangements for our services, or if their activity levels decline, our revenue may decline and our business will suffer.

We may be unable to accurately predict the timing of revenue recognition from sales activity as it is often dependent on achieving certain events or performance milestones, and this inability could impact our operating results.

Our ability to recognize revenue is dependent upon several factors including the transfer of customer-specific information such as unique subscriber IDs, which are required for us to implement customers on our SaaS-based platform and certain platform applications. Accordingly, if customers do not provide us with the specified information in a timely manner, our ability to recognize revenue will be delayed, which could adversely impact our operating results. In addition, implementation completion and acceptance of our SaaS-based platform and certain platform applications by our customers must be achieved, survey responses must be received and tabulated, and delivery of courseware is required in connection with subscription-based products for us to recognize revenue.

Because we recognize revenue from subscriptions for our products and services over the term of the subscription period, downturns or upturns in sales may not be immediately reflected in our operating results.

We recognize approximately 72% of our revenue from customers monthly over the terms of their subscription agreements, which have initial contract terms ranging from one to four or five years. As a result, much of the revenue we report in each quarter is related to subscription agreements entered into during previous quarters. Consequently, a decline in new or renewed subscription agreements in any one quarter will not necessarily be fully reflected in the revenue in that quarter and will negatively affect our revenue in future quarters. In addition, we may be unable to adjust our cost structure to reflect this reduced revenue. Accordingly, the effect of significant downturns in sales and market acceptance of our products and services may not be fully reflected in our results of operations until future periods. Additionally, our subscription model also makes it difficult for us to rapidly increase our revenue through additional sales in any period, as revenue from new customers must be recognized over the applicable subscription term. Finally, the majority of costs associated with our sales cycles are incurred up front before revenue recognition commences, and therefore periods of strong sales performance may increase our costs in the near term negatively affecting our financial performance.

We may not be able to meet our strategic business objectives unless we obtain additional financing, which may not be available to us on favorable terms, or at all.

We expect our current cash and investment balances, revolving credit facility, and cash flows from operations to be sufficient to meet our cash requirements through at least 2014. However, we may need to raise additional funds in order to:

• develop new, or enhance existing, services or products;

• respond to competitive pressures;

• finance working capital requirements;

• acquire complementary businesses, technology, content or products; or

• otherwise effectively execute our growth strategy.

At December 31, 2013, we had approximately $108.2 million in cash, cash equivalents, and marketable securities. We also have up to $20.0 million of availability under a revolving credit facility, subject to certain covenants, which expires in July 2014. We expect to incur between $9.0 and $12.0 million of capital expenditures, software development and content purchases during 2014. We actively review possible business acquisitions to complement or enhance our products and services. We may not have adequate cash and investments or availability under our revolving credit facility to consummate one or more of these acquisitions. The capital markets have been experiencing extreme volatility and disruption, and we cannot assure you that if we need additional financing that it will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, our ability to fund expansion, take advantage of available opportunities, develop or enhance services or products or otherwise respond to competitive pressures would be significantly limited. If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our existing shareholders may be reduced.

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We have significant goodwill and identifiable intangible assets recorded on our balance sheet that may be subject to impairment losses that would reduce our reported assets and earnings.

As of December 31, 2013, our balance sheet included goodwill of $35.7 million and identifiable intangible assets of $8.9 million. There are inherent uncertainties in the estimates, judgments and assumptions used in assessing recoverability of goodwill and intangible assets. Economic, legal, regulatory, competitive, reputational, contractual, and other factors could result in future declines in the operating results of our business units or market value declines that do not support the carrying value of goodwill and identifiable intangible assets. If the value of our goodwill and/or intangible assets is impaired, accounting rules require us to reduce their carrying value and report an impairment charge, which would reduce our reported assets and earnings for the period in which an impairment is recognized.

The current uncertain economic environment may have a negative impact on our customers and us which could have a significant impact on our revenue, operating results and financial condition.

It is difficult to predict the full magnitude and duration of the current uncertain economic environment and its related impact on our customers, suppliers and our company. For example, our customers may experience fluctuations or declines in their business and as a consequence, some customers may choose to invest less in information technology assets for their business which, in turn, could have an impact on us. The potential negative effects on us include, but are not limited to, reductions in our renewal and revenue growth rates, shorter contract terms, pricing pressures, and delays in payments from customers that increase our accounts receivable resulting in a deterioration of our cash flow and working capital position. We continue to monitor general economic conditions, however, and depending on the severity and/or duration of any economic downturn, these circumstances could have a material adverse effect on our revenue, results from operations and financial condition.

We may not be able to demonstrate compliance with Sarbanes-Oxley Section 404 in a timely manner, and the correction of any deficiencies identified during upcoming annual audits may be costly and could harm our business.

Sarbanes-Oxley Section 404 requires our management to report on, and requires our independent public accounting firm to attest to, the effectiveness of our internal controls over financial reporting. The rules governing the standards to be met are complex and will require significant process review, documentation and testing, as well as possible remediation efforts for any identified deficiencies. This process of review, documentation, testing and remediation will result in increased expenses and require significant attention from management and other internal and external resources. Any material weaknesses identified during this process may preclude us from asserting the effectiveness of our internal controls. This may negatively affect our stock price if we cannot effectively remediate the issues identified in a timely manner.

Changes in generally accepted accounting principles (GAAP) and other accounting regulations and interpretations could require us to delay recognition of revenue and/or accelerate the recognition of expenses, resulting in lower earnings.

While we believe we correctly account for and recognize revenue and expenses, any changes in GAAP or other accounting regulations and interpretations concerning revenue and expense recognition could decrease our revenue or increase our expenses. Changes to regulations concerning revenue recognition could require us to alter our current revenue accounting practices and cause us to either defer revenue into a future period, or to recognize lower revenue in a current period. Likewise, changes to regulations concerning expense recognition could require us to alter our current expense accounting practices and cause us to defer recognition of expense into a future period, or to recognize increased expenses in a current period. Changes to either revenue recognition or expense recognition accounting practices could affect our financial performance.

Risks Related to Sales, Marketing and Competition

Our operating margins could be affected if our ongoing refinement to pricing models for our products and services is not accepted by our customers and the market.

We continue to make changes in our pricing and our product and service offerings to increase revenue and to meet the needs of our customers. We cannot predict whether our current pricing and products and services, or any ongoing refinements we make will be accepted by our existing customer base or by prospective customers. If our customers and potential customers decide not to accept our current or future pricing or product and service offerings, it could have a material adverse effect on our business.

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Risks Related to Operations

We may be unable to adequately develop our systems, processes and support in a manner that will enable us to meet the demand for our services.

We have provided our online products and services since 1999 and continue to develop our ability to provide our solutions on both a subscription and transactional basis over the Internet. Our future success will depend on our ability to effectively develop and maintain the infrastructure, including procurement of additional hardware and software, and implement the services, including customer support, necessary to meet the demand for our products and services. Our inability from time to time to successfully develop the necessary systems and implement the necessary services on a timely basis has resulted in our customers experiencing some delays, interruptions and/or errors in their service. Such delays or interruptions may cause customers to become dissatisfied with our service and move to competing providers of traditional and online training and education services. If this happens, our revenue and reputation could be adversely affected, which would have a material adverse effect on our financial condition.

Our business operations could be significantly disrupted if we lose members of, or fail to integrate, our management team.

Our future performance is substantially dependent on the continued services of our management team and our ability to retain and motivate them. The loss of the services of any of our officers or senior managers could harm our business, as we may not be able to find suitable replacements. We do not have employment agreements with any of our key personnel, other than our chief executive officer, and we do not maintain any “key person” life insurance policies.

We may not be able to hire and retain a sufficient number of qualified employees and, as a result, we may not be able to effectively execute our growth strategy or maintain the quality of our services.

Our future success will depend on our ability to attract, train, motivate, and retain other highly skilled technical, managerial, marketing, customer support, and survey personnel. Competition for certain personnel is intense, especially for developers, web designers and sales personnel, and we may be unable to successfully attract sufficiently qualified personnel. We have in the past and continue to experience difficulty hiring qualified personnel in a timely manner for these positions. The pool of qualified technical personnel, in particular, is limited in Nashville, Tennessee, where our headquarters are located. Our interviewing center is located in Laurel, Maryland, and we may experience difficulty in maintaining and recruiting qualified individuals to perform these services. We will also need to maintain or increase the size of our staff to support our anticipated growth, without compromising the quality of our offerings or customer service. Our inability to locate, hire, integrate and retain qualified personnel in sufficient numbers may reduce the quality of our services and impair our ability to grow.

We may not be able to upgrade our hardware and software technology infrastructure quickly enough to effectively meet demand for our services or our operations needs.

We must continue to obtain reasonably priced, commercially available hardware and operating software as well as continue to enhance our software and systems to accommodate the increased use of our platform, the increased courseware and content in our library, and the resulting increase in operational demands on our business. Decisions about hardware and software enhancements are based in part on estimated forecasts of the growth in demand for our services. This growth in demand for our services is difficult to forecast and the potential audience for our services is widespread and dynamic. If we are unable to increase the data storage and processing capacity of our systems at least as fast as the growth in demand, our customers may encounter delays or disruptions in their service. Unscheduled downtime could harm our business and also could discourage current and potential customers from using or continuing to use our services and reduce future revenue. If we are unable to acquire, update, or enhance our technology infrastructure and systems quickly enough to effectively meet increased operational demands on our business, that may also have a material adverse effect on our financial condition.

Our network infrastructure and computer systems and software may fail.

An unexpected event (including but not limited to a telecommunications failure, fire, earthquake, or other catastrophic loss) at our Internet service providers’ facilities or at our on-site data facility could cause the loss of critical data and prevent us from offering our products and services for an unknown period of time. System downtime could negatively affect our reputation and ability to sell our products and services and may expose us to significant third-party claims. Our business interruption insurance may not adequately compensate us for losses that may occur. In addition, we rely on third parties to securely store our archived data, house our web server and network systems and connect us to the Internet. While our service providers have planned for certain contingencies, the failure by any of these third parties to provide these services satisfactorily and our inability to find suitable replacements would impair our ability to access archives and operate our systems and software, and our customers may encounter delays. Such disruptions could harm our reputation and cause customers to become dissatisfied and possibly take their business to a competing provider, which would adversely affect our revenues.

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We may lose users and lose revenue if our security measures fail.

If the security measures that we use to protect customer or personal information are ineffective, we may lose users of our services, which could reduce our revenue, tarnish our reputation, and subject us to significant liability. We rely on security and authentication technology licensed from third parties. With this technology, we perform real-time credit card authorization and verification, as well as the encryption of other selected secure customer data. We cannot predict whether these security measures could be circumvented by new technological developments. Further, the audit processes and controls used within our production platforms may not be sufficient to identify and prevent errors or deliberate misuse. In addition, our software, databases and servers may be vulnerable to computer viruses, physical or electronic attacks and similar disruptions. We may need to spend significant resources to protect against security breaches or to alleviate problems caused by any breaches. We cannot assure that we can prevent all security breaches.

We may experience errors in our software products that administer and report on hospital performance, and these errors could result in action taken against us that could harm our business.

Certain survey data collected and reported by us, such as the survey data included as part of our CAHPS^® Hospital survey is used by CMS to determine, in part, the amount of reimbursement payments to hospitals, and any errors in data collection, survey sampling, or statistical reporting could result in reduced reimbursements to our hospital customers if we are unable to correct these errors, and this could, in turn, result in litigation against us. Further, this survey data reported to CMS is then published by CMS to the general public, and any errors we experience that result in incorrect scoring on our hospital customer may result in damage to that hospital’s reputation, and the hospital may in turn bring litigation against us. We may be required to indemnify against such claims, and defending against any such claims could be costly, time consuming and could negatively affect our business.

Risks Related to Government Regulation, Content and Intellectual Property

Government regulation may subject us to liability or require us to change the way we do business.

The laws and regulations that govern our business change rapidly. Evolving areas of law that are relevant to our business include privacy and security laws, proposed encryption laws, content regulation, information security accountability regulation, sales and use tax laws and regulations and attempts to regulate activities on the Internet. In addition to being directly subject to certain requirements of the HIPAA privacy and security regulations, we are required through contracts with our customers known as “business associate agreements” to protect the privacy and security of certain personal and health related information. As of September 23, 2013, we are required to comply with revised requirements under the HIPAA privacy and security regulations, except that existing business associate agreements may qualify for an extended compliance date of September 23, 2014. The rapidly evolving and uncertain regulatory environment could require us to change how we do business or incur additional costs. Further, we cannot predict how changes to these laws and regulations might affect our business. Failure to comply with applicable laws and regulations could subject us to civil and criminal penalties, subject us to contractual penalties, including termination of our customer agreements, damage our reputation and have a detrimental impact on our business.

We may not be able to maintain our certification to conduct CMS mandated surveys, and this could adversely affect our business.

Our survey product offerings include providing survey services to assist customers in their compliance with CMS regulations. We are currently designated by CMS as a certified vendor to offer CAHPS^® Hospital Surveys and CAHPS^® Home Health Care Surveys, including data collection and submission services. If we are unable to maintain these certifications, or secure certifications for future CMS mandated surveys, we would not be able to administer these survey instruments for our customers and our business may suffer.

Any reduction or change in the regulation of continuing education and training in the healthcare industry may adversely affect our business.

Our business model is dependent in part on required training and continuing education for healthcare professionals and other healthcare workers resulting from regulations of state and federal agencies, state licensing boards and professional organizations. Any change in these regulations that reduce the requirements for continuing education and training for the healthcare industry could harm our business. In addition, a portion of our business with pharmaceutical and medical device manufacturers and hospitals is predicated on our ability to maintain accreditation status with organizations such as the ACCME, ANCC, and ACPE. The failure to maintain status as an accredited provider could have a detrimental effect on our business.

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We may be liable to third parties for content that is available from our online library.

We may be liable to third parties for the content in our online library if the text, graphics, software or other content in our library violates copyright, trademark, or other intellectual property rights, our content partners violate their contractual obligations to others by providing content to our library, or the content does not conform to accepted standards of care in the healthcare profession. We attempt to minimize these types of liabilities by requiring representations and warranties relating to our content partners’ ownership of the rights to distribute as well as the accuracy of their content. We also take necessary measures to review this content ourselves. Although our agreements with our content partners in most instances contain provisions providing for indemnification by the content providers in the event of inaccurate content, our content partners may not have the financial resources to meet this obligation. Alleged liability could harm our business by damaging our reputation, requiring us to incur legal costs in defense, exposing us to awards of damages and costs, and diverting management’s attention away from our business.

Protection of certain intellectual property may be difficult and costly, and our inability to protect our intellectual property could reduce the value of our products and services.

Despite our efforts to protect our intellectual proprietary rights, a third party could, without authorization, copy or otherwise misappropriate our content, information from our databases, or other intellectual property. Our agreements with employees, consultants and others who participate in development activities could be breached and result in our trade secrets becoming known, or our trade secrets and other intellectual property could be independently developed by competitors. We may not have adequate remedies for such breaches or protections against such competitor developments. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States, and effective intellectual property protection may not be available in those jurisdictions. We currently own several applications and registrations for trademarks and domain names in the United States and other countries as well as certain common law trademarks and service marks. The current system for registering, allocating and managing domain names has been the subject of litigation and proposed regulatory reform. Additionally, legislative proposals have been made by the federal government that would afford broad protection to owners of databases of information, such as stock quotes. This protection of databases already exists in the European Union.

Our business could be harmed if unauthorized parties infringe upon or misappropriate our intellectual property, proprietary systems, content, platform, services or other information. Our efforts to protect our intellectual property through copyright, trademarks and other controls may not be adequate. For instance, we may not be able to secure trademark or service mark registrations for marks in the United States or in foreign countries, or to secure patents for our proprietary products and services, and even if we are successful in obtaining patent and/or trademark registrations, these registrations may be opposed or invalidated by a third party.

There has been substantial litigation in the computer and online industries regarding intellectual property assets, particularly patents. Third parties may claim infringement by us with respect to current and future products, trademarks or other proprietary rights, and we may counterclaim against such third parties in such actions. Any such claims or counterclaims could be time-consuming, result in costly litigation, divert management’s attention, cause product release delays, require us to redesign our products, restrict our use of the intellectual property subject to such claim, or require us to enter into royalty or licensing agreements, any of which could have a material adverse effect upon our business, financial condition and operating results. Such royalty and licensing agreements may not be available on terms acceptable to us, if at all.

We may be liable for infringing the intellectual property rights of others.

Our competitors may develop similar intellectual property, duplicate our products and/or services, or design around any patents or other intellectual property rights we hold. In the future, litigation may be necessary to enforce our intellectual property rights or to determine the validity and scope of the patents, intellectual property or other proprietary rights of third parties, which could be time consuming and costly and have an adverse effect on our business and financial condition. Intellectual property infringement claims could be made against us, especially as the number of our competitors grows. These claims, even if not meritorious, could be expensive and divert our attention from operating our company and result in a temporary inability to use the intellectual property subject to such claim. In addition, if we and/or our affiliates and customers become liable to third parties for infringing their intellectual property rights, we could be required to pay a substantial damage award and develop comparable non-infringing intellectual property, to obtain a license, or to cease providing the content or services that contain the infringing intellectual property. We may be unable to develop non-infringing intellectual property or obtain a license on commercially reasonable terms, if at all.

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Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Our principal office is located in Nashville, Tennessee. Our lease for approximately 73,000 square feet at this location expires in April 2017. The lease provides for a two-year renewal option with rates increasing during the renewal period. We are leasing approximately 19,000 square feet of office space in Laurel, Maryland. The lease expires in March 2016. We are leasing approximately 7,000 square feet of office space in Brentwood, Tennessee, and the lease expires in October 2015. We are also leasing approximately 6,000 square feet of office space in Pensacola Florida, and the lease expires in March 2015.

Item 3. Legal Proceedings

None.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the NASDAQ Global Select Market under the symbol “HSTM”. Our common stock began trading on the NASDAQ National Market on April 14, 2000.

The following table sets forth, for each quarter of the two most recent years, the high and low closing prices per share of our common stock as reported on the NASDAQ Global Select Market:

	Common Stock Price
	2013				2012
	High		Low		High		Low
First Quarter	$	25.23	$	20.59	$	24.05	$	16.48
Second Quarter		27.75		20.04		26.22		20.72
Third Quarter		37.88		26.03		30.47		23.27
Fourth Quarter		39.46		30.21		30.53		22.28

As of February 27, 2014, there were 96 registered holders and 7,449 beneficial holders of our common stock. Because many of such shares are held by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of shareholders represented by these record holders.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our common stock, and we do not anticipate paying cash dividends in the foreseeable future. We intend to retain earnings for use in the operation of our business.

See the table labeled “Securities Authorized for Issuance Under Equity Compensation Plans” to be contained in our 2014 Proxy Statement, incorporated by reference in Part III, Item 12 of this Annual Report on Form 10-K.

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STOCK PERFORMANCE GRAPH

The graph below compares the cumulative total shareholder return on our common stock since December 31, 2008, with the cumulative total return of companies on the NASDAQ Composite Index and the NASDAQ Computer & Data Processing Index over the same period (assuming the investment of $100 in our common stock, the NASDAQ Composite Index and the NASDAQ Computer & Data Processing Index on December 31, 2008 (for our stock and the indices) and reinvestment of all dividends).

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN ⁽¹⁾

Among HealthStream, Inc., The NASDAQ Composite Index

And The NASDAQ Computer & Data Processing Index

(1) $100 invested on 12/31/2008 in stock or index-including reinvestment of dividends. Fiscal year ending December 31.

RECENT SALES OF UNREGISTERED SECURITIES

None.

ISSUER PURCHASES OF EQUITY SECURITIES

None.

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Item 6. Selected Financial Data

The selected statement of income and balance sheet data for the past five years are derived from our audited consolidated financial statements. You should read the following selected financial data in conjunction with our consolidated financial statements and the notes to those statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” located elsewhere in this report.

HealthStream acquired DCI on June 29, 2012, Sy.Med on October 19, 2012, and BLG on September 9, 2013. The results of operations for these acquired companies are included within our consolidated statement of income data effective from the date of acquisition. Revenues may be subject to fluctuations as discussed further in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” located elsewhere in this report. During 2013, 2012, 2011, and 2010, we recorded a tax provision of approximately $6.4 million, $5.9 million, $4.4 million and $2.9 million, respectively. During 2009 we recognized portions of our deferred tax assets through the reversal of the valuation allowance, resulting in deferred income tax benefits of approximately $9.1 million. As a result of these factors, the annual results presented below are not comparable. The operating results for any single year are not necessarily indicative of the results to be expected in the future.

	Year Ended December 31,
	(in thousands, except per share data)
	2013		2012		2011		2010		2009
STATEMENT OF INCOME DATA:
Revenues, net	$	132,274	$	103,732	$	82,066	$	65,754	$	57,398
Total operating costs and expenses		117,608		90,273		70,728		58,695		52,276
Income from operations		14,666		13,459		11,338		7,059		5,122
Net income	$	8,418	$	7,645	$	6,944	$	4,154	$	13,972
Net income per share – basic	$	0.31	$	0.29	$	0.31	$	0.19	$	0.65
Net income per share – diluted	$	0.30	$	0.28	$	0.29	$	0.18	$	0.64
Weighted average shares of common stock outstanding – basic		26,853		26,128		22,445		21,767		21,458
Weighted average shares of common stock outstanding – diluted		27,663		27,507		23,748		22,488		21,838
BALANCE SHEET DATA:
Cash and cash equivalents	$	59,537	$	41,365	$	76,904	$	17,868	$	12,287
Marketable securities – short and long term		48,659		51,952		12,548		5,703		—
Accounts receivable, net		25,314		15,348		16,014		11,069		9,577
Goodwill and intangible assets		44,616		38,104		23,104		23,991		24,938
Working capital		90,912		83,259		78,631		19,524		10,714
Total assets		212,594		174,528		154,237		82,011		71,002
Deferred revenue		38,168		23,146		22,759		16,740		12,234
Shareholders’ equity		149,433		132,196		120,915		56,791		51,821

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of the financial condition and results of operations of HealthStream should be read in conjunction with “Selected Financial Data” and HealthStream’s Consolidated Financial Statements and related notes thereto included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. HealthStream’s actual results may differ significantly from the results discussed and those anticipated in these forward-looking statements as a result of many factors, including but not limited to those described under “Risk Factors” and elsewhere in this report.

OVERVIEW

We provide subscription-based workforce development and research/patient experience solutions for healthcare organizations—all designed to assess and develop the people that deliver patient care which, in turn, supports the improvement of business and clinical outcomes. Our workforce development products are used by healthcare organizations to meet a broad range of their training, certification, competency assessment, performance appraisal, and development needs, while our research/patient experience products provide our customers information about patients’ experiences and how to improve them, workforce engagement, physician relations, and community perceptions of their services. HealthStream’s customers include healthcare organizations, pharmaceutical and medical device companies, and other participants in the healthcare industry. Our customer base includes approximately 4,000 healthcare organizations (predominately acute-care facilities) throughout all 50 states.

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Revenues for the year ended December 31, 2013 were approximately $132.3 million compared to $103.7 million for the year ended December 31, 2012, an increase of 27.5%. Operating income increased by 9.0% to $14.7 million for 2013, compared to $13.5 million for 2012. Net income increased by 10.1% to $8.4 million for 2013, compared to $7.6 million for 2012. Earnings per share (EPS) were $0.30 per share (diluted) for 2013 compared to $0.28 per share (diluted) for 2012. Revenues from HealthStream Workforce Development Solutions grew by 32.1%, or $25.3 million, and revenues from HealthStream Research/Patient Experience Solutions grew by 13.1%, or $3.3 million. We had approximately 3.71 million total subscribers, of which approximately 3.39 million were fully implemented subscribers on our SaaS-based platform at December 31, 2013. During 2013, we renewed approximately 700,000 subscribers, representing a 97% renewal rate for the subscribers up for renewal, and a 97% renewal rate based on the annual contract value up for renewal. Additionally, annualized revenue per implemented subscriber increased to $32.41 per subscriber at the end of 2013, up from $27.04 per subscriber at the end of 2012, representing a 19.9% increase. As of December 31, 2013 our cash and investment balances approximated $108.2 million, and we maintained full availability under our $20.0 million revolving credit facility.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Revenue Recognition

We recognize revenues from our subscription-based workforce development products and courseware subscriptions based on a per person subscription basis, and in some cases on a per license basis. Fees are based on the size of the facilities’ or organizations’ employee user population and the service offerings to which they subscribe. Subscription-based revenue is recognized ratably over the service period of the underlying contract. All other service revenues are recognized as the related services are performed or products are delivered.

Revenues derived from the license of installed software products, associated with the Sy.Med products, are recognized upon shipment or installation of the software. Software support and maintenance revenues are recognized ratably over the term of the related agreement.

Revenues from research/patient experience services are recognized when survey results are delivered to customers via either Internet-based reporting throughout the survey period or by providing final survey results once all services are complete. A significant portion of revenues for survey and reporting services that are provided through the use of Internet-based reporting methodologies are recognized using the proportional performance method, reflecting recognition throughout the service period which corresponds with the survey cycle and reporting access by the customer, which typically ranges from one to five months. If survey results are delivered to the customer after all services have been completed, then the corresponding revenues are recognized in full in the period such results are provided to the customer. Coaching and consulting revenues are generally recognized using the proportional performance method as these services are performed throughout the contract term. All other revenues are recognized as the related services are performed or products are delivered to the customer. Revenues for these services can be subject to seasonal factors based on customers’ requirements that can impact the timing, frequency, and volume of survey cycles.

Revenues from professional services include content maintenance, consulting, and implementation services. Fees are based on the time and efforts involved, and revenue is recognized upon completion of performance milestones using the proportional performance method.

We offer training services for clients to facilitate integration of our SaaS-based products. Fees for training are based on the time and efforts of the personnel involved. Basic online training is generally included in the initial contract; however, incremental training is fee based and revenues are generally recognized upon completion of training services.

Accounting for Income Taxes

The Company accounts for income taxes using the asset and liability method, whereby deferred tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities measured at tax rates that will be in effect for the year in which the differences are expected to affect taxable income. Management periodically assesses the realizability of its deferred tax assets, and to the extent that we believe a recovery is not likely, we establish a valuation allowance to reduce the deferred tax asset to the amount we estimate will be recoverable. The Company maintains a valuation allowance of approximately $1.3 million for the portion of its deferred tax assets which are related to the portion of our NOLs associated with deductions for stock option exercises.

Software Development Costs

Software development includes our costs to develop and maintain our products and applications, including our SaaS-based workforce development platform products and our survey reporting applications. Once planning is completed and development begins, we capitalize internal costs and payments to third parties associated with the development efforts where the life expectancy is greater than one year and the anticipated cash flows are expected to exceed the cost of the related asset. During 2013 and 2012, we capitalized approximately $4.3 million and $4.4 million, respectively, for software development. Such amounts are included in the accompanying consolidated balance sheets under the caption “capitalized software development.” We amortize capitalized software development costs over their expected life, which is generally three to five years. Capitalized software development costs are subject to a periodic impairment review in accordance with our impairment review policy.

In connection with software development, our significant estimates involve the assessment of the development period for new products, as well as the expected useful life of underlying software or product created. Once capitalized, software development costs are subject to the policies and estimates described below regarding goodwill, intangibles and other long-lived assets.

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Goodwill, Intangibles and Other Long-lived Assets

The Company evaluates goodwill for impairment at the reporting unit level by assessing whether it is more likely than not that the fair value of a reporting unit exceeds its carrying value. If this assessment concludes that is more likely than not that the fair value of a reporting unit exceeds its carrying value, then goodwill is not considered impaired and no further impairment testing is required. Conversely, if the assessment concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, a goodwill impairment test is performed to compare the fair value of the reporting unit to its carrying value. The Company determines fair value of the reporting units using both income and market based models. Our models contain significant assumptions and accounting estimates about discount rates, future cash flows and terminal values that could materially affect our operating results or financial position if they were to change significantly in the future and could result in an impairment. We perform our goodwill impairment assessment whenever events or changes in facts or circumstances indicate that impairment may exist and also during the fourth quarter each year. Intangible assets and other long-lived assets are also reviewed for events or changes in facts and circumstances, both internally and externally, which may indicate an impairment is present. We measure any impairment using observable market values or discounted future cash flows from the related long-lived assets. The cash flow estimates and discount rates incorporate management’s best estimates, using appropriate and customary assumptions and projections at the date of evaluation.

Allowance for Doubtful Accounts

We estimate the allowance for doubtful accounts using both a specific and non-specific identification method. Management’s evaluation includes reviewing past due accounts on a case-by-case basis, and determining whether an account should be reserved, based on the facts and circumstances surrounding each potentially uncollectible account. An allowance is also maintained for accounts not specifically identified that may become uncollectible in the future. Uncollectible accounts are written-off in the period management believes it has exhausted every opportunity to collect payment from the customer. Bad debt expense is recorded when events or circumstances indicate an additional allowance is necessary based on our specific and non-specific identification approach. Our allowance for doubtful accounts totaled approximately $211,000 as of December 31, 2013.

Stock Based Compensation

We recognize compensation expense using a fair-value based method for costs related to share based payments including stock options and restricted share units. Measurement of such compensation expense requires significant estimation and assumptions; however, we believe that the Black Scholes option pricing model we use for calculating the fair value of our stock based compensation plans provides a reasonable measurement methodology using a framework that is widely adopted.

As of December 31, 2013, we had two stock incentive plans which qualified as stock based compensation plans. During the years ended December 31, 2013, 2012, and 2011, we recorded approximately $1.5 million, $1.1 million, and $0.8 million of stock based compensation expense, respectively. We have historically granted stock options or restricted share units to our management group on an annual basis, or when new members of the management group begin their employment. We have historically granted stock options or restricted share units to non-employee members of our board of directors in conjunction with our annual shareholders meeting, or as new members are added on a pro rata basis based on the time elapsed since our annual shareholders’ meeting. We expect to continue providing equity based awards to our management group and our board of directors for the foreseeable future. As of December 31, 2013, total future compensation cost related to non-vested awards not yet recognized was approximately $2.5 million net of estimated forfeitures, with a weighted average expense recognition period of 2.3 years. Future compensation expense recognition for new equity based award grants will vary depending on the timing and size of new awards granted, changes in the market price or volatility of our common stock, changes in risk-free interest rates, or if actual forfeitures vary significantly from our estimates.

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, net. Revenues for our HealthStream Workforce Development Solutions business segment primarily consist of the following products and services: provision of services through our SaaS-based platform, authoring tools, a variety of courseware subscriptions, competency and performance appraisal tools, implementation and consulting services, content development, online sales training courses (RepDirect™), HospitalDirect^®, SimVentures, and a variety of other educational activities to serve professionals that work within healthcare organizations. HealthStream Workforce Development Solutions revenues also include products from the recent acquisitions of DCI and Sy.Med. Revenues for our HealthStream Research/Patient Experience Solutions business segment consist of quality and satisfaction surveys, data analyses of survey results, coaching/consulting services, and other research-based measurement tools focused on patients, employees, physicians, and other members of the community.

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Cost of Revenues (excluding depreciation and amortization). Cost of revenues (excluding depreciation and amortization) consists primarily of salaries and employee benefits, stock based compensation, employee travel and lodging, materials, outsourced phone survey support, contract labor, hosting costs, and other direct expenses associated with revenues, as well as royalties paid by us to content providers based on a percentage of revenues. Personnel costs within cost of revenues are associated with individuals that facilitate product delivery, provide services, conduct, process and manage phone and paper-based surveys, handle customer support calls or inquiries, manage the technology infrastructure for our hosted applications, manage content and survey services, coordinate content maintenance services, and provide training or implementation services.

Product Development. Product development consists primarily of salaries and employee benefits, contract labor, stock based compensation, content acquisition costs before technological feasibility is achieved, costs associated with the development of content and expenditures associated with maintaining, developing and operating our training, delivery and administration platforms. In addition, product development expenses are associated with the development of new software feature enhancements and new products. Personnel costs within product development include our systems, application development, and quality assurance teams, product managers, and other personnel associated with content and product development.

Sales and Marketing. Sales and marketing consists primarily of salaries, commissions and employee benefits, stock based compensation, employee travel and lodging, advertising, trade shows, promotions, and related marketing costs. We host a national customer conference in Nashville known as “Summit,” a portion of the costs of which are included in sales and marketing expenses. Personnel costs within sales and marketing include our sales teams, relationship managers, and marketing personnel.

Other General and Administrative Expenses. Other general and administrative expenses consist primarily of salaries and employee benefits, stock based compensation, employee travel and lodging, facility costs, office expenses, fees for professional services, business development and acquisition related costs, and other operational expenses. Personnel costs within general and administrative expenses include individuals associated with normal corporate functions (accounting, legal, human resources, administrative, internal information systems, and executive management) as well as personnel who maintain our accreditation status with various organizations.

Depreciation and Amortization. Depreciation and amortization consist of fixed asset depreciation, amortization of intangibles considered to have definite lives, amortization of content development fees, and amortization of capitalized software development.

Other Income (Expense), Net. The primary component of other income is interest income related to interest earned on cash, cash equivalents and investments in marketable securities. The primary component of other expense is interest expense related to our revolving credit facility.

2013 Compared to 2012

Revenues, net. Revenues increased approximately $28.5 million, or 27.5%, to $132.3 million for 2013 from $103.7 million for 2012. Revenues for 2013 consisted of $103.8 million, or 78% of total revenue, for HealthStream Workforce Development Solutions and $28.5 million, or 22% of total revenue, for HealthStream Research/Patient Experience Solutions. In 2012, revenues consisted of $78.6 million, or 76% of total revenue, for HealthStream Workforce Development Solutions and $25.2 million, or 24% of total revenue, for HealthStream Research/Patient Experience Solutions.

Revenues for HealthStream Workforce Development Solutions increased $25.3 million, or 32.1%, over 2012. Revenues from our subscription-based workforce development products increased by $22.5 million, or 31.0% over 2012 due to a higher number of subscribers and more courseware consumption by subscribers. Annualized revenue per implemented subscriber increased by 19.9%, to $32.41 per subscriber at the end of 2013 compared to $27.04 per subscriber at the end of 2012. Our implemented subscribers increased by 15.4% during 2013 to 3.39 million subscribers at the end of 2013 compared to 2.94 million subscribers at the end of 2012. Additionally, we had a 19.6% increase in total subscribers, with 3.71 million total subscribers at December 31, 2013 compared to 3.1 million total subscribers at December 31, 2012. Revenues in 2013 were positively influenced by courseware subscriptions associated with, among other products, ICD-10 training. Revenues from ICD-10 training were approximately $13.9 million in 2013, an increase of $11.5 million over 2012. Revenues from our credentialing software product, an installed solution, contributed $3.9 million during 2013, up $3.4 million over 2012. Revenues from SimVentures, our collaborative arrangement with Laerdal Medical A/S, increased by $664,000, or 39.8 percent, over the prior year to $2.3 million. Revenues from project-based services decreased $1.2 million from the prior year due to fewer content development projects.

Revenues for HealthStream Research/Patient Experience Solutions increased $3.3 million or 13.1%, over 2012. Revenues from Patient Insights™ surveys, our survey research product that generates recurring revenues, increased by $2.5 million, or 12.8%, over the prior year. Revenues from other surveys, which are conducted on annual or bi-annual cycles, declined by $449,000, or 8.3%, compared to the prior year due to fewer survey engagements. The financial results for Baptist Leadership Group (BLG) have been included in the Company’s financial statements from the date of acquisition (September 9, 2013) and are included in the HealthStream Research/Patient Experience Solutions segment. BLG revenues were approximately $1.2 million during 2013, and contributed to the revenue increase over 2012.

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Cost of Revenues (excluding depreciation and amortization). Cost of revenues increased approximately $13.9 million, or 33.5%, to $55.6 million for 2013 from $41.7 million for 2012. Cost of revenues as a percentage of revenues was 42.0% of revenues for 2013 compared to 40.2% of revenues for 2012. Cost of revenues for HealthStream Workforce Development Solutions increased approximately $11.1 million to $39.5 million and approximated 38.0% and 36.1% of revenues for HealthStream Workforce Development Solutions for 2013 and 2012, respectively. The increase is primarily associated with increased royalties paid by us resulting from growth in courseware subscription revenues and increased personnel expenses. Cost of revenues for HealthStream Research/Patient Experience Solutions increased approximately $2.9 million to $16.1 million and approximated 56.7% and 52.7% of revenues for HealthStream Research/Patient Experience Solutions for 2013 and 2012, respectively. The increase is primarily the result of additional costs associated with the growth in patient survey volume over the prior year and increased personnel expenses, including costs associated with the acquisition of BLG during September 2013.

Product Development. Product development expenses increased approximately $3.2 million, or 36.6%, to $11.8 million for 2013 from $8.6 million for 2012. Product development expenses as a percentage of revenues were 8.9% and 8.3% of revenues for 2013 and 2012, respectively.

Product development expenses for HealthStream Workforce Development Solutions increased approximately $3.2 million and approximated 9.9% and 9.0% of revenues for HealthStream Workforce Development for 2013 and 2012, respectively. The increase over the prior year is due to additional personnel expenses associated with new development initiatives related to our platform products. Product development expenses for HealthStream Research/Patient Experience Solutions decreased approximately $75,000 and approximated 5.3% and 6.2% of revenues for HealthStream Research/Patient Experience Solutions in 2013 and 2012, respectively.

Sales and Marketing. Sales and marketing expenses, including personnel costs, increased approximately $4.2 million, or 20.9%, to $24.1 million for 2013 from $19.9 million for 2012. Sales and marketing expenses as a percentage of revenues were 18.2% and 19.2% of revenues for 2013 and 2012, respectively.

Sales and marketing expenses for HealthStream Workforce Development Solutions increased approximately $4.3 million and approximated 17.6% and 17.9% of revenues for HealthStream Workforce Development Solutions for 2013 and 2012, respectively. This expense amount increase is primarily due to additional personnel and related expenses, increased commissions associated with higher sales performance compared to the prior year period, and increased travel expenses. Sales and marketing expenses for HealthStream Research/Patient Experience Solutions decreased approximately $4,000, and approximated 19.0% and 21.5% of revenues for HealthStream Research/Patient Experience Solutions for 2013 and 2012, respectively.

Other General and Administrative Expenses. Other general and administrative expenses increased approximately $4.9 million, or 36.4%, to $18.3 million for 2013 from $13.5 million for 2012. Other general and administrative expenses as a percentage of revenues were 13.9% and 13.0% of revenues for 2013 and 2012, respectively.

Other general and administrative expenses for HealthStream Workforce Development Solutions increased approximately $1.0 million over the prior year period primarily due to additional personnel, rent, and other support costs, while other general and administrative expenses for HealthStream Research/Patient Experience Solutions increased approximately $200,000 compared to the prior year period primarily due to additional personnel. The unallocated corporate portion of other general and administrative expenses increased approximately $3.7 million over the prior year period, primarily associated with additional personnel, professional fees, stock based compensation expense, rent, taxes, and other general expenses, as well as one-time expenses associated with the acquisition of BLG. During 2013, we incurred approximately $405,000 of costs associated with both the completed acquisition of BLG and other costs for evaluating potential transactions as part of our business development initiatives.

Depreciation and Amortization. Depreciation and amortization increased approximately $1.2 million, or 17.9%, to $7.9 million for 2013 from $6.7 million for 2012. The increase primarily resulted from amortization of capitalized software development assets and amortization of intangibles assets, as well as depreciation expense associated with leasehold improvements to our Nashville, Tennessee office space.

Other Income (Expense), Net. Other income (expense), net was approximately $176,000 for 2013 compared to $118,000 for 2012. The improvement over the prior year period was associated with higher interest income from investments in marketable securities.

Income Tax Provision. The Company recorded a provision for income taxes of $6.4 million for 2013 compared to $5.9 million for 2012. The Company’s effective tax rate was 43.3% for 2013 compared to 43.7% for 2012.

Net Income. Net income increased approximately $773,000, or 10.1%, to $8.4 million for 2013 from $7.6 million for 2012. Earnings per diluted share were $0.30 per share for 2013, compared to $0.28 per diluted share for 2012.

Adjusted EBITDA (which we define as net income before interest, income taxes, stock-based compensation, and depreciation and amortization) increased by 12.7% to approximately $23.9 million for 2013 compared to $21.2 million for 2012. This improvement is consistent with the factors mentioned above. See Reconciliation of Non-GAAP Financial Measures in Management’s Discussion and Analysis of Financial Condition and Results of Operations for our reconciliation of this calculation to measures under US GAAP.

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2012 Compared to 2011

Revenues, net. Revenues increased approximately $21.7 million, or 26.4%, to $103.7 million for 2012 from $82.1 million for 2011. Revenues for 2012 consisted of $78.6 million, or 76% of total revenue, for HealthStream Workforce Development Solutions and $25.2 million, or 24% of total revenue, for HealthStream Research/Patient Experience Solutions. In 2011, revenues consisted of $58.1 million, or 71% of total revenue, for HealthStream Workforce Development Solutions and $24.0 million, or 29% of total revenue, for HealthStream Research/Patient Experience Solutions.

Revenues for HealthStream Workforce Development Solutions increased $20.5 million, or 35.3%, over 2011. Revenues from our subscription-based workforce development products increased by $17.6 million, or 32.2% over 2011 due to a higher number of subscribers and more courseware consumption by subscribers. Annualized revenue per implemented subscriber increased by 17.7%, to $27.04 per subscriber at the end of 2012 compared to $22.97 per subscriber at the end of 2011. Our implemented subscriber base increased by 14% during 2012 to 2.94 million implemented subscribers at the end of 2012 compared to 2.57 million implemented subscribers at the end of 2011. Additionally, we had a 13% increase in total subscribers, with 3.1 million total subscribers at December 31, 2012 compared to 2.75 million total subscribers at December 31, 2011. Revenues from project-based services increased by $1.5 million compared to 2011 due to more engagements than the prior year. Revenues from SimVentures, our collaborative arrangement with Laerdal Medical, increased approximately $844,000 over 2011.

Revenues for HealthStream Research/Patient Experience Solutions increased $1.2 million or 4.9%, over 2011. Revenues from Patient Insights™ surveys, our survey research product that generates recurring revenues, increased by $1.8 million, or 10.1%, over 2011. Revenues from other surveys, which are conducted on annual or bi-annual cycles, declined by $633,000, or 10.5%, compared to 2011 due to fewer survey engagements.

Cost of Revenues (excluding depreciation and amortization). Cost of revenues increased approximately $10.6 million, or 34.1%, to $41.7 million for 2012 from $31.1 million for 2011. Cost of revenues as a percentage of revenues was 40.2% of revenues for 2012 compared to 37.9% of revenues for 2011. Cost of revenues for HealthStream Workforce Development Solutions increased approximately $9.5 million to $28.4 million and approximated 36.1% and 32.4% of revenues for HealthStream Workforce Development Solutions for 2012 and 2011, respectively. The increase is primarily associated with increased royalties paid by us resulting from growth in courseware subscription revenues, increased personnel expenses, and increased costs associated with project-based services. Cost of revenues for HealthStream Research/Patient Experience Solutions increased approximately $1.0 million to $13.3 million and approximated 52.7% and 51.0% of revenues for HealthStream Research/Patient Experience Solutions for 2012 and 2011, respectively. The increase is primarily the result of additional costs associated with the growth in patient survey volume over 2011.

Product Development. Product development expenses increased approximately $1.1 million, or 15.2%, to $8.6 million for 2012 from $7.5 million for 2011. Product development expenses as a percentage of revenues were 8.3% and 9.1% of revenues for 2012 and 2011, respectively.

Product development expenses for HealthStream Workforce Development Solutions increased approximately $1.1 million and approximated 9.0% and 10.2% of revenues for HealthStream Workforce Development Solutions for 2012 and 2011, respectively. The decrease as a percentage of revenue is the result of the growth in revenues over the prior year period, while the increase in amount is due to additional personnel expenses associated with the maintenance of our platform, as well as working on new product development initiatives. Product development expenses for HealthStream Research/Patient Experience Solutions increased approximately $4,000 and approximated 6.2% and 6.5% of revenues for HealthStream Research/Patient Experience Solutions in 2012 and 2011, respectively.

Sales and Marketing. Sales and marketing expenses, including personnel costs, increased approximately $3.9 million, or 24.2%, to $19.9 million for 2012 from $16.0 million for 2011. Sales and marketing expenses as a percentage of revenues were 19.2% and 19.5% of revenues for 2012 and 2011, respectively.

Sales and marketing expenses for HealthStream Workforce Development Solutions increased approximately $3.2 million and approximated 17.9% and 18.7% of revenues for HealthStream Workforce Development Solutions for 2012 and 2011, respectively. This expense increase is primarily due to additional personnel and related expenses, increased travel expenses, increased marketing spending, increased expenses for our annual customer Summit, and increased commissions associated with higher sales performance compared to the prior year period. Sales and marketing expenses for HealthStream Research/Patient Experience Solutions increased approximately $687,000, and approximated 21.5% and 19.7% of revenues for HealthStream Research/Patient Experience Solutions for 2012 and 2011, respectively. The expense increase was primarily due to additional personnel and related expenses and increased commissions.

Other General and Administrative Expenses. Other general and administrative expenses increased approximately $2.7 million, or 25.0%, to $13.5 million for 2012 from $10.8 million for 2011. Other general and administrative expenses as a percentage of revenues were 13.0% and 13.1% of revenues for 2012 and 2011, respectively.

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Other general and administrative expenses for HealthStream Workforce Development Solutions increased approximately $644,000 over 2011 primarily due to employee recruiting costs, rent, and other support costs, while other general and administrative expenses for HealthStream Research/Patient Experience Solutions decreased approximately $302,000 compared to 2011 primarily due to lower personnel costs. The unallocated corporate portion of other general and administrative expenses increased approximately $2.4 million over 2011, primarily associated with additional personnel, professional fees, stock based compensation expense, rent, franchise taxes, and other general expenses, as well as one-time expenses associated with the acquisitions of DCI and Sy.Med. During 2012, we incurred approximately $678,000 of costs associated with the completed acquisitions of DCI and Sy.Med, and other costs for evaluating potential transactions as part of our business development initiatives.

Depreciation and Amortization. Depreciation and amortization increased approximately $1.2 million, or 23.1%, to $6.7 million for 2012 from $5.4 million for 2011. The increase primarily resulted from amortization of capitalized software development assets and amortization of intangibles assets for DCI and Sy.Med within HealthStream Workforce Development Solutions and depreciation expense associated with leasehold improvements to our Nashville, Tennessee office space.

Other Income (Expense), Net. Other income, net was approximately $118,000 for 2012 compared to $10,000 for 2011. The improvement over 2011 was associated with higher interest income from investments in marketable securities.

Income Tax Provision. The Company recorded a provision for income taxes of $5.9 million for 2012 compared to $4.4 million for 2011. The Company’s effective tax rate was 43.7% for 2012 compared to 38.8% for 2011. The increase in the effective tax rate primarily resulted from changes in certain state apportionment factor estimates, which resulted in a higher proportion of income subject to taxation in those states and a reduction in our state operating loss carryforwards.

Net Income. Net income increased approximately $701,000, or 10.1%, to $7.6 million for 2012 from $6.9 million for 2011. Earnings per diluted share (diluted) were $0.28 per share for 2012, compared to $0.29 per diluted share for 2011. A key factor impacting the comparison of EPS (diluted) for 2012 to EPS (diluted) for 2011 was the effect of additional shares of the Company’s common stock outstanding that were issued during the Company’s fourth quarter 2011 stock offering. The impact of the stock offering increased the weighted average outstanding share count by approximately 3.6 million shares for 2012 compared to 2011.

Adjusted EBITDA (which we define as net income before interest, income taxes, stock-based compensation, and depreciation and amortization) increased by 21.1% to approximately $21.2 million for 2012 compared to $17.5 million for 2011. This improvement is consistent with the factors mentioned above. See Reconciliation of Non-GAAP Financial Measures in Management’s Discussion and Analysis of Financial Condition and Results of Operations for our reconciliation of this calculation to measures under US GAAP.

Reconciliation of Non-GAAP Financial Measures

This report contains certain non-GAAP financial measures, including, non-GAAP net income, non-GAAP operating income, non-GAAP revenue and adjusted EBITDA, which are used by management in analyzing the Company’s financial results and ongoing operational performance. These non-GAAP financial measures should not be considered as a substitute for, or superior to, measures of financial performance which are prepared in accordance with US GAAP and may be different from non-GAAP financial measures used by other companies.

In order to better assess the Company’s financial results, management believes that adjusted EBITDA is an appropriate measure for evaluating the operating performance of the Company because adjusted EBITDA reflects net income adjusted for non-cash and non-operating items. Adjusted EBITDA is also used by many investors and securities analysts to assess the Company’s results from current operations. Adjusted EBITDA is a non-GAAP financial measure and should not be considered as a measure of financial performance under US GAAP. Because adjusted EBITDA is not a measurement determined in accordance with US GAAP, it is susceptible to varying calculations. Accordingly, adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies.

The Company understands that, although adjusted EBITDA is frequently used by investors and securities analysts in their evaluation of companies, this measure has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for an analysis of the Company’s results as reported under US GAAP. For example, adjusted EBITDA does not reflect cash expenditures, or future requirements for capital expenditures or contractual commitments; it does not reflect non-cash components of employee compensation; it does not reflect changes in, or cash requirements for, our working capital needs; and due to the Company’s utilization of federal and state net operating loss carryforwards and other available tax deductions in 2011, 2012, and 2013, actual cash income tax payments have been significantly less than the tax provision recorded in accordance with US GAAP, and income tax payments will continue to be less than the income tax provision until our existing federal and state net operating loss carryforwards have been fully utilized or have expired.

Management compensates for the inherent limitations associated with using adjusted EBITDA through disclosure of such limitations, presentation of our financial statements in accordance with US GAAP, and reconciliation of adjusted EBITDA to net income, the most directly comparable US GAAP measure.

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As discussed elsewhere in this report, the Company completed the acquisitions of DCI during June 2012, Sy.Med in October 2012, and BLG in September 2013. In accordance with US GAAP reporting requirements for fair value, we recorded a deferred revenue write-down of $192,000 for DCI, $916,000 for Sy.Med, and $254,000 for BLG. These write-downs will result in lower revenues than would have otherwise been recognized for such services.

In order to provide more accurate trends and comparisons of the Company’s revenues, operating income, and net income, management believes that adding back the deferred revenue write-down associated with fair value accounting for acquired businesses provides a better indication of the ongoing performance of the Company. The revenue for the acquired contracts is deferred and typically recognized over a one year period, so our US GAAP revenues for the one year period after the acquisition will not reflect the full amount of revenues that would have been reported if the acquired deferred revenue was not written down to fair value.

	2013			2012			2011
GAAP net income	$	8,418		$	7,645		$	6,944
Interest income		(263	)		(181	)		(51	)
Interest expense		51			48			48
Income tax provision		6,424			5,932			4,404
Stock based compensation expense		1,458			1,136			788
Depreciation and amortization		7,852			6,661			5,412
Adjusted EBITDA	$	23,940		$	21,241		$	17,545
GAAP revenues	$	132,274		$	103,732		$	82,066
Adjustment for deferred revenue write-down		839			490			—
Non-GAAP revenues	$	133,113		$	104,222		$	82,066
GAAP operating income	$	14,666		$	13,459		$	11,338
Adjustment for deferred revenue write-down		839			490			—
Non-GAAP operating income	$	15,505		$	13,949		$	11,338
GAAP net income	$	8,418		$	7,645		$	6,944
Adjustment for deferred revenue write-down, net of tax		476			276			—
Non-GAAP net income	$	8,894		$	7,921		$	6,944

FINANCIAL OUTLOOK FOR 2014

The Company provides projections and other forward-looking information in this “Financial Outlook for 2014” section within “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” This section contains many forward-looking statements, particularly relating to the Company’s future financial performance. These forward-looking statements are estimates based on information currently available to the Company, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to the precautionary statements set forth in the introduction in Part I of this Annual Report on Form 10-K above. Actual results are likely to differ, and in the past have differed, materially from those forecast by the Company, depending on the outcome of various factors, including, but not limited to, those set forth in Item 1A, Risk Factors.

On March 3, 2014, the Company acquired all of the stock of Health Care Compliance Strategies, Inc. (HCCS) for approximately $13.0 million in cash and 81,614 shares of its common stock. Taking into consideration the HCCS acquisition, the Company anticipates that consolidated revenues for the full year 2014 will grow by 25 percent to 29 percent as compared to 2013, which revenue growth reflects the impact of the deferred revenue write-down related to the HCCS acquisition. We anticipate revenue growth in the Workforce Development Solutions segment, which will include HCCS, to be in the 27 percent to 31 percent range, also reflecting the impact of the deferred revenue write-down related to the HCCS acquisition. We expect the Research/Patient Experience Solutions segment’s revenue to increase by approximately 18 percent to 22 percent, part of which growth includes revenues from the BLG acquisition which we closed in September 2013. The foregoing guidance does not include the impact from any other transactions that we may complete during 2014.

We anticipate that the Company’s 2014 full-year operating income will decrease between two and eleven percent over full-year 2013. This operating income estimated range includes the impact of HCCS, of which between $2.5 to $3.0 million relates to the combined impact of deferred revenue fair value write-downs, amortization of intangibles, incremental investments in HCCS sales, marketing, and product development to drive future growth, and approximately $450,000 of transaction costs. Similar to our revenue guidance, this estimate does not include the impact from any other transactions that we may complete during 2014.

We anticipate that our 2014 capital expenditures will be between $9.0 million and $12.0 million. We expect our effective tax rate to range between 42 and 44 percent for the full-year of 2014.

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SELECTED QUARTERLY OPERATING RESULTS

The following tables set forth selected statements of income data for each of the eight quarters in the period ended December 31, 2013. The information for each quarter has been prepared on the same basis as the audited statements included in other parts of this report and, in our opinion, includes all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results of operations for these periods. You should read this information in conjunction with HealthStream’s Consolidated Financial Statements and related notes thereto included elsewhere in this report. The operating results for any quarter are not necessarily indicative of the results to be expected in the future.

Factors Affecting Quarterly Operating Results

Revenues from our subscription-based products are recognized ratably over the subscription term. Survey and research revenues are impacted by seasonal factors resulting from the volume, timing, and frequency of survey cycles.

	Quarter Ended
	March 31, 2013		June 30, 2013		September 30, 2013		December 31, 2013
	(In thousands, except per share data)
STATEMENT OF INCOME DATA:
Revenues, net	$	29,646	$	31,919	$	33,659	$	37,050
Total operating costs and expenses		26,473		27,813		29,780		33,541
Income from operations		3,173		4,106		3,879		3,509
Net income	$	1,941	$	2,422	$	2,296	$	1,760
Net income per share (1):
Basic	$	0.07	$	0.09	$	0.08	$	0.06
Diluted	$	0.07	$	0.09	$	0.08	$	0.06
Weighted average shares of common stock outstanding:
Basic		26,340		26,722		27,085		27,264
Diluted		27,409		27,649		27,735		27,858
	Quarter Ended
	March 31, 2012		June 30, 2012		September 30, 2012		December 31, 2012
	(In thousands, except per share data)
STATEMENT OF INCOME DATA:
Revenues, net	$	23,674	$	25,841	$	26,380	$	27,838
Total operating costs and expenses		21,333		21,800		22,649		24,492
Income from operations		2,341		4,041		3,731		3,346
Net income	$	1,420	$	2,427	$	1,977	$	1,821
Net income per share (1):
Basic	$	0.05	$	0.09	$	0.08	$	0.07
Diluted	$	0.05	$	0.09	$	0.07	$	0.07
Weighted average shares of common stock outstanding:
Basic		25,999		26,127		26,173		26,212
Diluted		27,335		27,501		27,591		27,600

(1) – Due to the nature of interim earnings per share calculations, the sum of quarterly earnings per share amounts may not equal the reported earnings per share for the full year.

Liquidity and Capital Resources

Net cash provided by operating activities increased by $3.8 million, or 16.7%, to $26.3 million during 2013 from $22.5 million during 2012. Our primary sources of cash were generated from receipts from the sales of our products and services. The number of days sales outstanding (DSO) was 56 days for 2013 and 55 days for 2012. The Company calculates DSO by dividing the average accounts receivable balance (excluding unbilled and other receivables) by average daily revenues for the year. The primary uses of cash to fund our operations include personnel expenses, sales commissions, royalty payments, payments for contract labor and other direct expenses associated with delivery of our products and services, and general corporate expenses.

Net cash used in investing activities was approximately $15.0 million during 2013 and $59.0 million during 2012. During 2013, the Company purchased $86.1 million of marketable securities, utilized $7.6 million (net of cash acquired) for acquisitions, spent $4.3 million for capitalized software development, purchased $4.4 million of property and equipment, and made $0.3 million in non-marketable equity investments. These uses of cash were partially offset by maturities and sales of marketable securities of $87.7 million. During 2012, the Company purchased $118.2 million of marketable securities, utilized $9.9 million (net of cash acquired) for acquisitions, spent $4.4 million for capitalized software development, purchased $4.3 million of property and equipment, and made $0.2 million in non-marketable equity investments. These uses of cash were partially offset by maturities of marketable securities of $78.1 million.

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Cash provided by financing activities was approximately $6.9 million during 2013 and $934,000 during 2012. The primary source of cash from financing activities for 2013 and 2012 included proceeds (net of payroll taxes paid) of $3.2 million and $823,000, respectively, from the exercise of employee stock options and issuance of RSUs. In addition, the Company recognized excess tax benefits from equity awards of $3.7 million and $111,000 in 2013 and 2012, respectively.

Revenues increased and operating income improved over the prior year, and our balance sheet reflects positive working capital of $90.9 million at December 31, 2013 compared to $83.3 million at December 31, 2012. The increase in working capital primarily resulted from increases in cash and investment balances and accounts receivable. At December 31, 2013, the Company’s primary source of liquidity was $108.2 million of cash and cash equivalents and marketable securities. The Company also has a $20.0 million revolving credit facility loan agreement, all of which was available at December 31, 2013.

We believe that our existing cash and cash equivalents, marketable securities, cash generated from operations, and available borrowings under our revolving credit facility will be sufficient to meet anticipated cash needs for working capital, new product development and capital expenditures for at least the next 12 months. Over the past nine years, we have utilized our federal and state net operating loss carryforwards to offset taxable income, therefore reducing our income tax liabilities. We anticipate our remaining net operating loss carryforwards will become fully utilized over the next 12 to 24 months. Our actual tax payments are expected to increase significantly once the net operating loss carryforwards are fully utilized. As part of our growth strategy, we have recently completed several acquisitions and we continue to review possible acquisitions that complement our products and services. We anticipate that future acquisitions, if any, would be effected through a combination of stock and cash consideration. The issuance of our stock as consideration for an acquisition or to raise additional capital could have a dilutive effect on earnings per share and could adversely affect our stock price. Our revolving credit facility contains financial covenants and availability calculations designed to set a maximum leverage ratio of outstanding debt to equity. Therefore, if we were to borrow against our revolving credit facility, our debt capacity would be dependent on the covenant values at the time of borrowing. As of December 31, 2013, we were in compliance with all covenants. The credit and capital markets have been experiencing extreme volatility and disruption. There can be no assurance that amounts available for borrowing under our revolving credit facility will be sufficient to consummate any possible acquisitions, and we cannot assure you that if we need additional financing that it will be available on terms favorable to us, or at all. Failure to generate sufficient cash flow from operations or raise additional capital when required in sufficient amounts and on terms acceptable to us could harm our business, financial condition and results of operations.

Off-Balance Sheet Arrangements and Contractual Obligations

The Company’s off-balance sheet arrangements primarily consist of operating leases, contractual obligations, and our revolving credit facility, which is described further in Note 14 to the Company’s consolidated financial statements contained elsewhere in this report.

The following table presents a summary of future anticipated payments due by the Company under contractual obligations with firm minimum commitments as of December 31, 2013, excluding amounts already recorded in the Consolidated Balance Sheets (in thousands):

	Payments due by period
	Less than 1 year		1-3 years		3-5 years		More than 5 years		Total
Operating leases	$	2,665	$	3,421	$	505	$	—	$	6,591
Purchase obligations		142		—		—		—		142
Total	$	2,807	$	3,421	$	505	$	—	$	6,733

Recent Accounting Pronouncements

In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-02), which is effective prospectively for public companies for reporting periods beginning after December 15, 2012. This new accounting standard improves the reporting of reclassifications out of accumulated other comprehensive income (AOCI) by requiring an entity to report the effect of significant reclassifications out of AOCI on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. We adopted this new guidance on January 1, 2013 and the adoption did not have a material effect on our consolidated financial statements.

29

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to market risk from changes in interest rates. We do not have any foreign currency exchange rate risk or commodity price risk. As of December 31, 2013, the Company had no outstanding debt. We may become subject to interest rate market risk associated with any future borrowings under our revolving credit facility. The interest rate under the revolving credit facility is based on 30 Day LIBOR plus a margin of either 175 or 200 basis points determined in accordance with a pricing grid. We are exposed to market risk with respect to our cash and investment balances, which approximated $108.2 million at December 31, 2013. Assuming a hypothetical 10% decrease in interest rates, interest income from cash and investments would decrease on an annualized basis by approximately $64,000.

The Company’s investment policy and strategy is focused on investing in highly rated securities, with the objective of minimizing the potential risk of principal loss. The Company’s policy limits the amount of credit exposure to any single issuer and sets limits on the average portfolio maturity.

The above market risk discussion and the estimated amounts presented are forward-looking statements of market risk assuming the occurrence of certain adverse market conditions. Actual results in the future may differ materially from those projected as a result of actual developments in the market.

30

Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Reports of Independent Registered Public Accounting Firm		32
Consolidated Balance Sheets		34
Consolidated Statements of Income		35
Consolidated Statements of Comprehensive Income		36
Consolidated Statements of Shareholders’ Equity		37
Consolidated Statements of Cash Flows		38
Notes to Consolidated Financial Statements		39

31

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of

HealthStream, Inc.

We have audited the accompanying consolidated balance sheets of HealthStream, Inc. as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2013. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of HealthStream, Inc. at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2013, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), HealthStream, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) and our report dated March 4, 2014 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Nashville, Tennessee

March 4, 2014

32

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of

HealthStream, Inc.

We have audited HealthStream, Inc.’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). HealthStream, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, HealthStream, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the 2013 consolidated financial statements of HealthStream, Inc. and our report dated March 4, 2014 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Nashville, Tennessee

March 4, 2014

33

HEALTHSTREAM, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)

	December 31, 2013			December 31, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	59,537		$	41,365
Marketable securities		48,659			51,952
Accounts receivable, net of allowance for doubtful accounts of $211 and $142 at December 31, 2013 and 2012, respectively		25,314			15,348
Accounts receivable - unbilled		1,392			1,163
Deferred tax assets, current		—			2,459
Prepaid royalties, net of amortization		8,857			3,738
Other prepaid expenses and other current assets		3,365			2,266
Total current assets		147,124			118,291
Property and equipment:
Equipment		21,631			18,108
Leasehold improvements		5,521			5,050
Furniture and fixtures		3,854			3,368
		31,006			26,526
Less accumulated depreciation and amortization		(21,968	)		(18,706	)
		9,038			7,820
Capitalized software development, net of accumulated amortization of $13,910 and $10,987 at December 31, 2013 and 2012, respectively		11,077			9,732
Goodwill		35,746			29,299
Intangible assets, net of accumulated amortization of $11,389 and $10,036 at December 31, 2013 and 2012, respectively		8,870			8,805
Other assets		739			581
Total assets	$	212,594		$	174,528
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,311		$	1,057
Accrued royalties		8,435			5,037
Accrued liabilities		5,503			4,671
Accrued compensation and related expenses		1,614			1,121
Deferred tax liabilities, current		181			—
Deferred revenue		38,168			23,146
Total current liabilities		56,212			35,032
Deferred tax liabilities, noncurrent		6,173			6,474
Other long term liabilities		776			826
Commitments and contingencies		—			—
Shareholders’ equity:
Common stock, no par value, 75,000 shares authorized; 27,327 and 26,233 shares issued and outstanding at December 31, 2013 and 2012, respectively		166,888			158,020
Accumulated deficit		(17,424	)		(25,842	)
Accumulated other comprehensive income (loss)		(31	)		18
Total shareholders’ equity		149,433			132,196
Total liabilities and shareholders’ equity	$	212,594		$	174,528

See accompanying notes to the consolidated financial statements.

34

HEALTHSTREAM, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

	For the Year Ended December 31,
	2013		2012		2011
Revenues, net	$	132,274	$	103,732	$	82,066
Operating costs and expenses:
Cost of revenues (excluding depreciation and amortization)		55,605		41,658		31,066
Product development		11,757		8,610		7,473
Sales and marketing		24,052		19,892		16,017
Other general and administrative expenses		18,342		13,452		10,760
Depreciation and amortization		7,852		6,661		5,412
Total operating costs and expenses		117,608		90,273		70,728
Income from operations		14,666		13,459		11,338
Other income (expense), net		176		118		10
Income before income tax provision		14,842		13,577		11,348
Income tax provision		6,424		5,932		4,404
Net income	$	8,418	$	7,645	$	6,944
Net income per share:
Basic	$	0.31	$	0.29	$	0.31
Diluted	$	0.30	$	0.28	$	0.29
Weighted average shares of common stock outstanding:
Basic		26,853		26,128		22,445
Diluted		27,663		27,507		23,748

See accompanying notes to the consolidated financial statements.

35

HEALTHSTREAM, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

	For the Year Ended December 31,
	2013			2012		2011
Net Income	$	8,418		$	7,645	$	6,944
Other comprehensive income, net of taxes:
Unrealized gain (loss) on marketable securities		(49	)		25		(2	)
Total other comprehensive income (loss)		(49	)		25		(2	)
Comprehensive income	$	8,369		$	7,670	$	6,942

See accompanying notes to the consolidated financial statements.

36

HEALTHSTREAM, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

	Common Stock				Accumulated			Accumulated Other Comprehensive			Total Shareholders’
	Shares		Amount		Deficit			Income (Loss)			Equity
Balance at December 31, 2010		21,805	$	97,227	$	(40,431	)	$	(5	)	$	56,791
Net income		—		—		6,944			—			6,944
Comprehensive loss		—		—		—			(2	)		(2	)
Stock based compensation		—		788		—			—			788
Tax benefits from equity awards		—		21		—			—			21
Common stock issued under stock plans, net of shares withheld for employee taxes		503		1,242		—			—			1,242
Issuance of common stock		3,588		55,131		—			—			55,131
Balance at December 31, 2011		25,896		154,409		(33,487	)		(7	)		120,915
Net income		—		—		7,645			—			7,645
Comprehensive income		—		—		—			25			25
Issuance of common stock in acquisitions		56		1,541		—			—			1,541
Stock based compensation		—		1,136		—			—			1,136
Tax benefits from equity awards		—		111		—			—			111
Common stock issued under stock plans, net of shares withheld for employee taxes		281		823		—			—			823
Balance at December 31, 2012		26,233		158,020		(25,842	)		18			132,196
Net income		—		—		8,418			—			8,418
Comprehensive loss		—		—		—			(49	)		(49	)
Issuance of common stock in acquisition		15		534		—			—			534
Stock based compensation		—		1,458		—			—			1,458
Tax benefits from equity awards		—		3,722		—			—			3,722
Common stock issued under stock plans, net of shares withheld for employee taxes		1,079		3,154		—			—			3,154
Balance at December 31, 2013		27,327	$	166,888	$	(17,424	)	$	(31	)	$	149,433

See accompanying notes to the consolidated financial statements.

37

HEALTHSTREAM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	For the Year Ended December 31,
	2013			2012			2011
OPERATING ACTIVITIES:
Net income	$	8,418		$	7,645		$	6,944
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		7,852			6,661			5,412
Deferred income taxes		2,506			5,601			4,027
Stock based compensation expense		1,458			1,136			788
Excess tax benefits from equity awards		(3,722	)		(111	)		(21	)
Provision for doubtful accounts		115			120			50
Loss on non-marketable equity investments		37			16			—
Other		1,660			722			83
Changes in assets and liabilities, net of acquisitions:
Accounts and unbilled receivables		(10,056	)		1,227			(4,997	)
Prepaid royalties		(5,119	)		(329	)		(263	)
Other prepaid expenses and other current assets		(1,207	)		(537	)		(283	)
Other assets		105			(15	)		212
Accounts payable		1,254			(1,529	)		211
Accrued royalties		3,399			1,579			1,450
Accrued liabilities, accrued compensation and related expenses, and other long-term liabilities		4,822			542			124
Deferred revenue		14,761			(198	)		6,018
Net cash provided by operating activities		26,283			22,530			19,755
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired		(7,560	)		(9,901	)		—
Proceeds from sales of marketable securities		5,062			—			2,221
Proceeds from maturities of marketable securities		82,661			78,075			8,135
Purchases of marketable securities		(86,139	)		(118,176	)		(17,284	)
Investments in non-marketable equity investments		(300	)		(250	)		—
Payments associated with capitalized software development		(4,267	)		(4,435	)		(6,065	)
Purchases of property and equipment		(4,444	)		(4,316	)		(4,115	)
Net cash used in investing activities		(14,987	)		(59,003	)		(17,108	)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock		—			—			55,131
Proceeds from exercise of stock options		3,318			823			1,242
Taxes paid related to net settlement of equity awards		(164	)		—			—
Excess tax benefits from equity awards		3,722			111			21
Payments on capital lease obligations		—			—			(5	)
Net cash provided by financing activities		6,876			934			56,389
Net increase (decrease) in cash and cash equivalents		18,172			(35,539	)		59,036
Cash and cash equivalents at beginning of year		41,365			76,904			17,868
Cash and cash equivalents at end of year	$	59,537		$	41,365		$	76,904
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	51		$	61		$	35
Income taxes paid	$	371		$	427		$	387
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock in connection with acquisitions	$	534		$	1,541		$	—
Acquisition of content rights in exchange for future services	$	—		$	500		$	—

See accompanying notes to the consolidated financial statements.

38

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Reporting Entity and Segments

HealthStream, Inc. (the “Company”) was incorporated in 1990 as a Tennessee corporation and is headquartered in Nashville, Tennessee. We operate our business in two segments: HealthStream Workforce Development Solutions and HealthStream Research/Patient Experience Solutions. Our Workforce Development products consist of SaaS-based services and subscription-based solutions to meet the ongoing training, certification, assessment and development needs of the healthcare community. These solutions provide, deliver and track computer based education for our customers in the United States through our software-as-a-service (SaaS) model. HealthStream Research/Patient Experience products offer healthcare organizations a wide range of quality and satisfaction surveys, consulting services, analyses of survey results, and other research-based services.

Recognition of Revenue

Revenues are derived from providing services through our SaaS-based workforce development platform products, courseware subscriptions, provision of survey and research services, professional services, content maintenance, custom courseware development and other education and training services.

The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when persuasive evidence of an arrangement exists, prices are fixed or determinable, services and products are provided to the customer and collectability is probable or reasonably assured.

Revenue recognized from software and other arrangements is allocated to each element of the arrangement based on the relative fair values of the elements. While elements include software products and post contract customer support, the fair value of each element is based on objective evidence specific to the vendor. If fair value cannot be determined for each element of the arrangement, all revenue from the arrangement is deferred until fair value can be determined or until all elements of the arrangement are delivered and customer acceptance has occurred. Sales of the Company’s SaaS-based workforce development platform products include customer support, implementation services, and training; therefore all revenues are deferred until the SaaS-based product is implemented, at which time revenues are recognized ratably over the subscription service period. In the event that circumstances occur, which give rise to uncertainty regarding the collectibility of contracted amounts, revenue recognition is suspended until such uncertainty is resolved. Fees for these services are billed on either a monthly, quarterly, or annual basis.

Revenues derived from the delivery of services through the Company’s SaaS-based workforce development platform products and courseware subscriptions are recognized ratably over the term of the subscription service agreement or over the historical usage period, if usage typically differs from the subscription period. Other training revenues are generally recognized upon the completion of training.

Revenues derived from the license of installed software products, associated with the Sy.Med products, are recognized upon shipment or installation of the software. Software support and maintenance revenues are recognized ratably over the term of the related agreement.

Revenues recognized from the Company’s survey and research services are determined using both the proportional performance method and the completed contract method. Revenues are generally earned over the estimated survey cycle, which typically ranges from less than one month to up to five months. The survey cycle is generally initiated based on the receipt of the first survey response and runs through provision of related survey reports to the customer. If survey results are not available to the customer during the survey fielding cycle, revenues are recognized at time of report delivery. Revenues for coaching and consulting engagements are recognized using the proportional performance method over the term of the underlying contract. Fees for survey services are billed upon initiation of the survey cycle, with progress billings made throughout the survey cycle. Fees for coaching and consulting engagements are billed upon initiation of the engagement with progress billings throughout the term of the contract.

Revenues from professional services, content maintenance, and custom courseware development services are recognized using a percentage of completion method based on labor hours, which correspond to the completion of performance milestones and deliverables. All other revenues are recognized as the related services are performed or products are delivered. Fees for these services are generally billed at project initiation and upon completion of various milestones.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All inter-company accounts and transactions have been eliminated in consolidation.

39

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates and such differences could be material to the consolidated financial statements.

Cash Equivalents

The Company considers cash equivalents to be unrestricted, highly liquid investments with initial maturities of less than three months.

Marketable Securities

Marketable securities are classified as available for sale and are stated at fair market value, with the unrealized gains and losses, net of tax, reported in other comprehensive income (loss) on the accompanying consolidated balance sheets. Realized gains and losses and declines in market value judged to be other than temporary on investments in marketable securities are included in interest and other income on the accompanying consolidated statements of income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available for sale are included in other income (expense) on the accompanying consolidated statements of income. Premiums and discounts are amortized over the life of the related available for sale security as an adjustment to yield using the effective interest method.

Accounts Receivable-Unbilled

Accounts receivable-unbilled represents the following: 1) revenue earned and recognized on contracts accounted for using the proportional performance method for which invoices have not been generated or contractual billing dates have not been reached; and 2) the difference between billings for contracts containing escalated pricing over the term of the agreement and the recognition of revenue ratably over the subscription period.

Deferred Revenue

Deferred revenue represents amounts, which have been billed or collected in advance of revenue recognition, and is recognized as the revenue recognition criteria are met. The Company typically invoices customers in quarterly, bi-annual, or annual installments.

Prepaid Royalties

Prepaid royalties represents advance payments associated with the sale of third party products, such as courseware subscriptions. Royalties are typically paid in advance at the commencement of the revenue cycle, or periodically throughout the revenue cycle, such as quarterly, bi-annual, or annual installments. Royalty payments are amortized over the term of the underlying contracts, which generally range from 12 to 36 months, in order to match the direct royalty costs to the same period the subscription revenue is recognized. Amortization of royalties is included under the caption “cost of revenues (excluding depreciation and amortization)” in the accompanying consolidated statements of income.

Allowance for Doubtful Accounts

The Company estimates its allowance for doubtful accounts using a specific identification method. Management determines the allowance for doubtful accounts on a case-by-case basis, based on the facts and circumstances surrounding each potentially uncollectible receivable. An allowance is also maintained for accounts that are not specifically identified that may become uncollectible in the future. Uncollectible receivables are written-off in the period management believes it has exhausted every opportunity to collect payment from the customer. Bad debt expense is recorded when events or circumstances indicate an additional allowance is required based on the Company’s specific identification approach.

Changes in the allowance for doubtful accounts and the amounts charged to bad debt expense for the years ended December 31, were as follows (in thousands):

	Allowance Balance at Beginning of Period		Charged to Costs and Expenses		Write-offs			Allowance Balance at End of Period
2013	$	142	$	115	$	(46	)	$	211
2012	$	149	$	120	$	(127	)	$	142
2011	$	157	$	50	$	(58	)	$	149

Capitalized Software Development

Capitalized software development is stated on the basis of cost, and is presented net of accumulated amortization. The Company capitalizes costs incurred during the software development phase for projects when such costs are material. These assets are amortized using the straight-line method, generally ranging between one to five years. The Company capitalized approximately $4.3 million and $4.4 million during 2013 and 2012, respectively. Maintenance and operating costs are expensed as incurred. As of December 31, 2013 and 2012, there were no capitalized internal development costs for computer software developed for resale.

40

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the inputs to valuation techniques used in measuring fair value. There are three levels to the fair value hierarchy based on the reliability of inputs, as follows:

Level 1	–	Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2	–	Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3	–	Unobservable inputs in which little or no market data exists, therefore requiring the Company to develop its own assumptions.

The Company evaluates assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them for each reporting period. This determination requires significant judgments to be made by the Company.

At December 31, 2013, the fair value measurement amounts for assets consisted of marketable securities which are classified as available for sale. The carrying amounts reported in the consolidated balance sheets approximate the fair value of the Company’s marketable securities based on quoted market prices or alternative pricing sources and models utilizing market observable inputs. At December 31, 2013 and 2012, the Company did not have any financial liabilities that were subject to fair value measurements.

Property and Equipment

Property and equipment are stated on the basis of cost. Depreciation and amortization are provided on the straight-line method over the following estimated useful lives, except for assets under capital leases and leasehold improvements, which are amortized over the shorter of the estimated useful life or their respective lease term. Depreciation and amortization of property and equipment totaled $3.3 million and $2.6 million for the years ended December 31, 2013 and 2012, respectively.

	Years
Furniture and fixtures		5-10
Equipment		3-5

Goodwill and Intangible Assets

Goodwill represents the excess of purchase price over fair value of net tangible assets acquired. The Company evaluates goodwill for impairment at the reporting unit level by assessing whether it is more likely than not that the fair value of a reporting unit exceeds its carrying value. If this assessment concludes that is more likely than not that the fair value of a reporting unit exceeds its carrying value, then goodwill is not considered impaired and no further impairment testing is required. Conversely, if the assessment concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, a goodwill impairment test is performed to compare the fair value of the reporting unit to its carrying value. The Company determines fair value of the reporting units using both income and market based models. The Company will perform its goodwill impairment test whenever events or changes in facts or circumstances indicate that impairment may exist, and at least annually during the fourth quarter.

As of December 31, 2013 intangible assets with remaining unamortized balances include contract rights and customer relationships, internally-developed technology and patents, non-competition agreements, and trade names. These intangible assets are considered to have definite useful lives and are being amortized on a straight line basis over periods typically ranging between five and ten years. The weighted average amortization period for definite lived intangible assets as of December 31, 2013 was 8.7 years. Intangible assets are reviewed for impairment whenever events or changes in facts or circumstances indicate that the carrying amount of the assets may not be recoverable. There were no impairments identified or recorded for the years ended December 31, 2013, 2012, or 2011.

Long-Lived Assets

Long-lived assets to be held for use are reviewed for events or changes in facts and circumstances, both internally and externally, which may indicate that an impairment of long-lived assets held for use is present. The Company measures any impairment using observable market values or discounted future cash flows from the related long-lived assets. The cash flow estimates and discount rates incorporate management’s best estimates, using appropriate and customary assumptions and projections at the date of evaluation. Management periodically evaluates whether the carrying value of long-lived assets, including property and equipment, capitalized software development, other assets and intangible assets will be recoverable. There were no impairments identified or recorded for the years ended December 31, 2013, 2012, or 2011.

41

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Other Assets

Other assets are comprised of the long-term portion of content development fees and non-marketable equity investments.

Non-Marketable Equity Investments

Non-marketable equity investments are accounted for using the equity method when the Company can exercise significant influence over the investee. Investments for which the Company is not able to exercise significant influence over the investee are accounted for under the cost method. The proportionate share of income or loss from equity method investments are recorded under the caption “other income (expense), net” in the accompanying consolidated statements of income.

Financial Instruments

The Company has financial instruments, including cash and cash equivalents, accounts receivable, accounts receivable-unbilled, accounts payable, accrued liabilities, and deferred revenue. The carrying amounts of these financial instruments approximate fair value because of the short term maturity or short term nature of such instruments. Marketable securities approximate fair value based on quoted market prices, see Note 4.

Income Taxes

Income taxes are accounted for using the asset and liability method, whereby deferred tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities measured at tax rates that will be in effect for the year in which the differences are expected to affect taxable income. Management evaluates all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed. Future realization of the tax benefit of an existing deductible temporary difference or carryforward ultimately depends on the existence of sufficient taxable income of the appropriate character within the carryback or carryforward period available under the tax law. There are four possible sources of taxable income that may be available under the tax law to realize a tax benefit for deductible temporary differences and carryforwards: 1) future reversals of existing taxable temporary differences, 2) future taxable income exclusive of reversing temporary differences and carryforwards, 3) taxable income in prior carryback year(s) if carryback is permitted under the tax law, and 4) tax-planning strategies that would, if necessary, be implemented to realize deductible temporary differences or carryforwards prior to their expiration. Management reviews the realizability of its deferred tax assets each reporting period to identify whether any significant changes in circumstances or assumptions have occurred that could materially affect the realizability of deferred tax assets. As of December 31, 2013, the Company had established a valuation allowance of $1.3 million for the portion of its net deferred tax assets that are not more likely than not expected to be realized.

The Company accounts for income tax uncertainties using a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax positions that meet the more-likely-than-not recognition threshold are measured in order to determine the tax benefit to be recognized in the financial statements. The Company expenses any penalties or interest associated with tax obligations as general and administrative expenses and interest expense, respectively.

Other Long Term Liabilities

Other long term liabilities represent the deferred rent liability associated with an operating lease for office space in Nashville, Tennessee as well as deferred service credits (see Note 9).

Advertising

The Company expenses the costs of advertising as incurred. Advertising expense for the years ended December 31, 2013, 2012, and 2011 was approximately $408,000, $349,000, and $251,000, respectively.

Shipping and Handling Costs

Shipping and handling costs that are associated with our products and services are included in cost of revenues.

Earnings Per Share

Basic earnings per share is computed by dividing the net income available to common shareholders for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing the net income for the period by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares, composed of incremental common shares issuable upon the exercise of stock options, are included in diluted net income per share to the extent these shares are dilutive. Common equivalent shares that have an anti-dilutive effect on diluted net income per share have been excluded from the calculation of diluted weighted average shares outstanding for the years ended December 31, 2013, 2012, and 2011.

42

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Concentrations of Credit Risk and Significant Customers

The Company places its temporary excess cash investments in high quality, short-term money market instruments. At times, such investments may be in excess of the FDIC insurance limits.

The Company sells its products and services to various companies in the healthcare industry that are located in the United States. We perform ongoing credit evaluations of our customers’ financial condition and generally require no collateral from customers. The Company did not have any single customer representing over 10% of net revenues during 2013, 2012, or 2011.

Stock Based Compensation

As of December 31, 2013, the Company maintains two stock based compensation plans, which are described in Note 12. The Company accounts for stock based compensation using the fair-value based method for costs related to share-based payments, including stock options and restricted share units. The Company uses the Black Scholes option pricing model for calculating the fair value of option awards issued under its stock based compensation plan. The Company measures compensation cost of restricted share units based on the closing fair market value of the Company’s stock on the date of grant. Stock based compensation cost is measured at the grant date, based on the fair value of the award that is ultimately expected to vest, and is recognized as an expense over the requisite service period. The Company recognizes tax benefits from stock based compensation if an excess tax benefit is realized. Excess tax benefits are recorded as an increase to common stock when realized.

Newly Issued Accounting Standards

In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-02), which is effective prospectively for public companies for reporting periods beginning after December 15, 2012. This new accounting standard improves the reporting of reclassifications out of accumulated other comprehensive income (AOCI) by requiring an entity to report the effect of significant reclassifications out of AOCI on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. We adopted this new guidance on January 1, 2013 and the adoption did not have a material effect on our consolidated financial statements.

2. SHAREHOLDERS’ EQUITY

Common Stock

The Company is authorized to issue up to 75 million shares of common stock. The number of common shares issued and outstanding as of December 31, 2013 and 2012 was approximately 27.3 million and 26.2 million, respectively.

Preferred Stock

The Company is authorized to issue up to 10 million shares of preferred stock in one or more series, having the relative voting powers, designations, preferences, rights and qualifications, limitations or restrictions, and other terms as the Board of Directors may fix in providing for the issuance of such series, without any vote or action of the shareholders. During 2000, all outstanding shares of preferred stock were converted into common stock in connection with our initial public offering (IPO). There have been no shares of preferred stock outstanding since our IPO.

43

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share for the three years ended December 31, 2013 (in thousands, except per share amounts):

	2013		2012		2011
Numerator:
Net income	$	8,418	$	7,645	$	6,944
Denominator:
Weighted-average shares outstanding		26,853		26,128		22,445
Effect of dilutive shares		810		1,379		1,303
Weighted-average diluted shares		27,663		27,507		23,748
Basic earnings per share	$	0.31	$	0.29	$	0.31
Diluted earnings per share	$	0.30	$	0.28	$	0.29

Potentially dilutive shares representing approximately 70,000, 105,000, and 247,000 shares of common stock for 2013, 2012, and 2011, respectively, were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive.

4. MARKETABLE SECURITIES

At December 31, 2013 and 2012, the fair value of marketable securities, which were all classified as available for sale, included the following (in thousands):

	December 31, 2013
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value
Level 2:
Certificates of deposit	$	2,260	$	—	$	—		$	2,260
Corporate debt securities		46,430		—		(31	)		46,399
Subtotal		48,690		—		(31	)		48,659
Total	$	48,690	$	—	$	(31	)	$	48,659
	December 31, 2012
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value
Level 1:
Mutual funds	$	5,042	$	30	$	—		$	5,072
Level 2:
Certificates of deposit		2,254		—		—			2,254
Commercial paper		3,122		1		—			3,123
Corporate debt securities		27,017		1		(17	)		27,001
U.S. government securities		14,499		3		—			14,502
Subtotal		46,892		5		(17	)		46,880
Total	$	51,934	$	35	$	(17	)	$	51,952

The carrying amounts reported in the consolidated balance sheet approximate fair value based on quoted market prices or alternative pricing sources and models utilizing market observable inputs. As of December 31, 2013, the Company does not consider any of its marketable securities to be other than temporarily impaired. During 2013, the Company recorded realized gains of approximately $5,000 from sales of marketable securities. All investments in marketable securities are classified as a current asset on the balance sheet because the underlying securities mature within one year from the balance sheet date.

44

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. BUSINESS COMBINATIONS

On June 29, 2012, the Company acquired all of the stock of Decision Critical, Inc., (DCI) an Austin, Texas based company that specializes in learning and competency management products for acute-care hospitals. The Company acquired DCI to further advance its suite of workforce development solutions. The consideration paid for DCI consisted of approximately $3.4 million in cash and 22,124 shares of our common stock. Also, the Company may make additional payments of up to $300,000, contingent upon achievement of certain financial targets and business outcomes within a three year period after the closing date. As of December 31, 2013, approximately $146,000 of these contingent payments have been paid to the DCI shareholders. The Company incurred approximately $203,000 in transaction costs associated with the DCI acquisition, which are included on the accompanying consolidated statements of income under the caption “other general and administrative.” In allocating the purchase price, the Company recorded approximately $2.9 million of goodwill, $1.5 million of identifiable intangible assets, $291,000 of net tangible assets and $456,000 of deferred tax liabilities. The goodwill balance is primarily attributed to assembled workforce, expanded market opportunities from DCI’s workforce development products, and expected synergies from integrating DCI’s products into our platform. The goodwill balance is not deductible for U.S. income tax purposes. The net tangible assets include deferred revenue, which in accordance with US GAAP, was adjusted down from a book value of $548,000 to an estimated fair value of $356,000. The deferred revenue recorded represents the estimated fair value of the contractual obligation assumed as of the acquisition date. The $192,000 write-down of deferred revenue resulted in lower revenues than would have otherwise been recognized for such services. The results of operations for DCI have been included in the Company’s consolidated financial statements from the date of acquisition, and are included in the HealthStream Workforce Development Solutions segment.

On October 19, 2012, the Company acquired all of the stock of Sy.Med Development, Inc. (Sy.Med), a Brentwood, Tennessee based company that specializes in credentialing related software products for healthcare providers. The Company acquired Sy.Med to further advance its suite of workforce development solutions. The consideration paid for Sy.Med consisted of approximately $7.4 million in cash and 34,060 shares of our common stock. The Company may make additional payments of up to $1.5 million, contingent upon achievement of certain financial targets and business outcomes within a two year period after the closing date. As of December 31, 2013, approximately $625,000 of these contingent payments have been paid to the Sy.Med shareholders. The Company incurred approximately $165,000 in transaction costs associated with the Sy.Med acquisition, which are included on the accompanying consolidated statements of income under the caption “other general and administrative.” In allocating the purchase price, the Company recorded approximately $5.4 million of goodwill, $6.5 million of identifiable intangible assets, $294,000 of net tangible assets and $2.8 million of deferred tax liabilities. The goodwill balance is primarily attributed to assembled workforce, additional market opportunities of Sy.Med’s credentialing software, and expected synergies from integrating Sy.Med’s products into our platform. The goodwill balance is not deductible for U.S. income tax purposes. The net tangible assets include deferred revenue, which was adjusted down from a book value of $1.1 million to an estimated fair value of $229,000. The $916,000 write-down of deferred revenue resulted in lower revenues than would have otherwise been recognized for such services. The results of operations for Sy.Med have been included in the Company’s consolidated financial statements from the date of acquisition, and are included in the HealthStream Workforce Development Solutions segment.

On September 9, 2013, the Company acquired substantially all of the assets of Baptist Leadership Group (BLG), a Pensacola, Florida based company that provides consulting services focused on patient-centered performance excellence in healthcare. The Company acquired BLG to strengthen its Research/Patient Experience Solutions. The consideration paid for BLG consisted of approximately $7.4 million in cash (taking into account the working capital adjustment) and 15,230 shares of our common stock. The Company incurred approximately $145,000 in transaction costs associated with the acquisition, which are included on the accompanying consolidated statements of income under the caption “other general and administrative.” In allocating the purchase price, the Company recorded approximately $6.3 million of goodwill, $1.6 million of identifiable intangible assets, and $28,000 of net tangible assets. The goodwill balance is primarily attributed to the assembled workforce, additional market opportunities from BLG’s consulting services, and expected synergies from integrating BLG into the operations of the HealthStream Research/Patient Experience Solutions segment. The goodwill balance is deductible for U.S. income tax purposes. The net tangible assets include deferred revenue, which was adjusted down from a book value of $508,000 to an estimated fair value of $254,000. The $254,000 write-down of deferred revenue resulted in lower revenues than would have otherwise been recognized for such services. The results of operations for BLG have been included in the Company’s consolidated financial statements from the date of acquisition, and are included in the HealthStream Research/Patient Experience Solutions segment.

45

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. GOODWILL

Goodwill is evaluated for impairment at least annually to determine whether it is more likely than not that the fair value of the reporting units exceed their carrying value. If this assessment concludes that is more likely than not that the fair value of a reporting unit exceeds its carrying value, then goodwill is not considered impaired and no further impairment testing is required. Qualitative factors are considered for this assessment, such as, financial performance, industry and market comparables, and other factors affecting the reporting unit. If the assessment concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, a goodwill impairment test is performed to compare the fair value of the reporting unit to its carrying value. The Company determines fair value of the reporting units using both income and market based models. Under these methods, the technique used to determine fair value is sensitive to estimates and assumptions associated with cash flow from operations and its growth, discount rates, and reporting unit terminal values. The Company performs its annual impairment evaluation of goodwill during the fourth quarter of each year and as changes in facts and circumstances indicate impairment exists. During the annual impairment evaluation in the fourth quarter of 2013 and 2012, the results of our assessment indicated goodwill was not impaired.

During 2013, the Company acquired Baptist Leadership Group, and during 2012, the Company acquired Decision Critical, Inc. and Sy.Med Development, Inc. The changes in the carrying amount of goodwill for the years ended December 31, 2013 and 2012 are as follows (in thousands):

	Workforce Development		Research/Patient Experience		Total
Balance at January 1, 2013	$	11,459	$	17,840	$	29,299
Acquisition of Sy.Med Development, Inc.		133		—		133
Acquisition of Baptist Leadership Group		—		6,314		6,314
Balance at December 31, 2013	$	11,592	$	24,154	$	35,746
	Workforce Development		Research/Patient Experience		Total
Balance at January 1, 2012	$	3,307	$	17,840	$	21,147
Acquisition of Sy.Med Development, Inc.		5,291		—		5,291
Acquisition of Decision Critical, Inc.		2,861		—		2,861
Balance at December 31, 2012	$	11,459	$	17,840	$	29,299

7. INTANGIBLE ASSETS

All intangible assets are considered to have finite useful lives. Customer related intangibles are amortized over their estimated useful lives ranging from eight to ten years. Other intangible assets include non-competition agreements, technology and patents, and trade names, and are being amortized over periods ranging from five to nine years. Amortization of intangible assets was approximately $1.5 million, $1.1 million, and $0.9 million, for the years ended December 31, 2013, 2012 and 2011, respectively.

Identifiable intangible assets are comprised of the following (in thousands):

	As of December 31, 2013							As of December 31, 2012
	Gross Amount		Accumulated Amortization			Net		Gross Amount		Accumulated Amortization			Net
Customer related	$	16,889	$	(10,145	)	$	6,744	$	15,619	$	(8,969	)	$	6,650
Other		3,370		(1,244	)		2,126		3,222		(1,067	)		2,155
Total	$	20,259	$	(11,389	)	$	8,870	$	18,841	$	(10,036	)	$	8,805

The expected future annual amortization expense for the years ending December 31, is as follows (in thousands):

2014	$	1,569
2015		1,211
2016		1,122
2017		1,092
2018		990
Thereafter		2,886
Total	$	8,870

46

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. COLLABORATIVE ARRANGEMENT

The Company participates in a collaborative arrangement, SimVentures^TM, with Laerdal Medical A/S (Laerdal Medical). The Company receives 50 percent of the profits or losses generated from this collaborative arrangement. The parties did not form a separate legal entity as part of the collaborative arrangement; therefore, the Company accounts for SimVentures as a collaborative arrangement in accordance with applicable accounting guidance. For the year ended December 31, 2013, the Company recorded approximately $2.3 million of revenues and $2.3 million of expenses related to the collaborative arrangement. For the year ended December 31, 2012, the Company recorded approximately $1.7 million of revenues and $1.7 million of expenses related to the collaborative arrangement. The Company also recorded approximately $0.9 million and $1.3 million of capitalized software development costs for SimVentures during 2013 and 2012, respectively.

9. CONTENT RIGHTS AND DEFERRED SERVICE CREDITS

During 2012, the Company entered into a renewal agreement with a customer in which the Company was provided continued rights to distribute and resell courseware owned by the customer. In exchange for the receipt of an exclusive license to distribute and resell this courseware, the Company has provided, and will continue to provide, the customer with service credits that can be exchanged for future purchases of the Company’s products and services. The value assigned to the content rights and the deferred service credits was $500,000, which represents the estimated fair value of the assets relinquished. The content rights are classified within other prepaid expenses and other assets, and the deferred service credits are classified within accrued liabilities and other long-term liabilities on our condensed consolidated balance sheets.

These exchangeable service credits will be issued annually through December 31, 2016, and will expire twenty-four months after issuance. Any unused credits will be forfeited upon expiration. During 2012 and 2013, the Company issued exchangeable service credits of $100,000, respectively, in accordance with this agreement, and is obligated to issue remaining service credits of $100,000 annually through 2016. The content rights are being amortized on a straight-line basis through December 31, 2016. Revenues for products or services provided in exchange for these service credits will be recognized in accordance with the Company’s revenue recognition policies.

10. BUSINESS SEGMENTS

The Company provides services to healthcare organizations and other members within the healthcare industry. These services are primarily focused on the delivery of workforce development products and services (HealthStream Workforce Development Solutions, formerly referred to as HealthStream Learning & Talent Management), as well as survey and research services (HealthStream Research/Patient Experience Solutions).

The Company measures segment performance based on operating income before income taxes and prior to the allocation of certain corporate overhead expenses, interest income, interest expense, and depreciation. The Unallocated component below includes corporate functions, such as accounting, human resources, legal, investor relations, administrative, and executive personnel, depreciation, a portion of amortization, and certain other expenses, which are not currently allocated in measuring segment performance. The following is the Company’s business segment information as of and for the years ended December 31, 2013, 2012 and 2011 (in thousands).

	Year ended December 31, 2013
	Workforce Development		Research/Patient Experience		Unallocated			Consolidated
Revenues, net	$	103,820	$	28,454	$	—		$	132,274
Cost of revenues (excluding depreciation and amortization)		39,478		16,127		—			55,605
Product development		10,262		1,495		—			11,757
Sales and marketing		18,301		5,415		336			24,052
Other general and administrative		3,787		1,530		13,025			18,342
Depreciation and amortization		3,512		1,068		3,272			7,852
Total income from operations	$	28,480	$	2,819	$	(16,633	)	$	14,666
*Segment assets	$	60,013	$	34,727	$	117,854		$	212,594
Purchases of property and equipment	$	2,598	$	171	$	1,675		$	4,444
Payments associated with capitalized software development	$	3,712	$	555	$	—		$	4,267

47

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. BUSINESS SEGMENTS (continued)

	Year ended December 31, 2012
	Workforce Development		Research/Patient Experience		Unallocated			Consolidated
Revenues, net	$	78,566	$	25,166	$	—		$	103,732
Cost of revenues (excluding depreciation and amortization)		28,390		13,268		—			41,658
Product development		7,040		1,570		—			8,610
Sales and marketing		14,081		5,420		391			19,892
Other general and administrative		2,760		1,330		9,362			13,452
Depreciation and amortization		2,877		1,179		2,605			6,661
Total income from operations	$	23,418	$	2,399	$	(12,358	)	$	13,459
*Segment assets	$	46,693	$	23,978	$	103,857		$	174,528
Purchases of property and equipment	$	1,728	$	120	$	2,468		$	4,316
Payments associated with capitalized software development	$	3,536	$	899	$	—		$	4,435
	Year ended December 31, 2011
	Workforce Development		Research/Patient Experience		Unallocated			Consolidated
Revenues, net	$	58,078	$	23,988	$	—		$	82,066
Cost of revenues (excluding depreciation and amortization)		18,842		12,224		—			31,066
Product development		5,907		1,566		—			7,473
Sales and marketing		10,871		4,733		413			16,017
Other general and administrative		2,116		1,632		7,012			10,760
Depreciation and amortization		2,364		1,194		1,854			5,412
Total income from operations	$	17,978	$	2,639	$	(9,279	)	$	11,338
*Segment assets	$	27,322	$	26,088	$	100,827		$	154,237
Purchases of property and equipment	$	1,577	$	44	$	2,494		$	4,115
Payments associated with capitalized software development	$	5,720	$	345	$	—		$	6,065

* Segment assets include accounts and unbilled receivables, prepaid royalties, prepaid and other current assets, other assets, capitalized software development, certain property and equipment, and intangible assets. Cash and cash equivalents and marketable securities are not allocated to individual segments, and are included within Unallocated. A significant portion of property and equipment assets are included within Unallocated.

48

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. INCOME TAXES

The provision for income taxes is comprised of the following (in thousands):

	Year Ended December 31,
	2013		2012		2011
Current federal	$	2,474	$	58	$	163
Current state		1,444		273		214
Deferred federal		2,315		4,804		3,723
Deferred state		191		797		304
Provision for income taxes	$	6,424	$	5,932	$	4,404

A reconciliation of income taxes at the statutory federal income tax rate to the provision for income taxes included in the accompanying consolidated statements of income is as follows (in thousands):

	Year Ended December 31,
	2013		2012		2011
Federal tax provision at the statutory rate	$	5,194	$	4,751	$	3,972
State income tax provision, net of federal benefit		898		974		337
Change in state valuation allowance		231		—		—
Other		101		207		95
Provision for income taxes	$	6,424	$	5,932	$	4,404

Management periodically assesses the realizability of its deferred tax assets, and to the extent that a recovery is not likely, a valuation allowance is established to reduce the deferred tax asset to the amount estimated to be recoverable. At December 31, 2013, a valuation allowance of $1.3 million exists, of which $1.1 million is comprised of the portion of net operating loss carryforwards attributable to the exercises of stock options. Any future reductions of the valuation allowance associated with the portion of the deferred tax asset comprised of stock option exercises would be recognized as an increase to common stock.

As of December 31, 2013, the Company had federal and state net operating loss carryforwards of $18.3 million and $13.9 million, respectively. These loss carryforwards will expire in years 2014 through 2024. As of December 31, 2013, $1.1 million of the net operating loss carryforwards deferred tax asset is attributable to the exercise of stock options, and if realized, the tax benefit will be recorded as an increase to common stock.

The Company has research and development tax credit carryforwards of $393,000 that expire in varying amounts through 2033. These credits were recognized in 2013 as a reduction to common stock. As of December 31, 2013, the Company had alternative minimum tax credit carryforwards of $592,000 that are available to offset future regular tax liabilities and they do not expire. Federal income tax payments of $28,000, $189,000 and $194,000, were made during the years ended December 31, 2013, 2012, and 2011, respectively. State income tax payments of $343,000, $238,000, and $193,000 were made during the years ended December 31, 2013, 2012, and 2011, respectively.

A reconciliation of the beginning and ending liability for gross unrecognized tax benefits at December 31, 2013 and 2012, are as follows (in thousands):

	December 31,
	2013		2012
Balance at beginning of year	$	—	$	—
Additions for tax positions in the current year		167		—
Balance at end of year	$	167	$	—

The components of the income tax liability at December 31, 2013 and 2012, are as follows (in thousands):

	December 31,
	2013		2012
Unrecognized tax benefits	$	167	$	—
Accrued interest and penalties		2		—
Balance at end of year	$	169	$	—

None of the $167,000 of unrecognized tax benefits at December 31, 2013, if recognized, would affect the Company’s effective tax rate.

49

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. INCOME TAXES (continued)

The Company is subject to income taxation at the federal and various state levels. The Company is subject to U.S. federal tax examinations for tax years 2009 through 2013. Loss carryforwards and credit carryforwards generated or utilized in years earlier than 2009 are also subject to examination and adjustment. The Company has no income tax examinations in process.

Deferred federal and state income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and deferred tax liabilities are as follows (in thousands):

	December 31,
	2013			2012
Deferred tax assets:
Allowance for doubtful accounts	$	84		$	57
Accrued liabilities		1,225			463
Tax credits		702			902
Stock based compensation		966			650
Net operating loss carryforwards		1,256			3,485
Total deferred tax assets		4,233			5,557
Less: Valuation allowance		(1,325	)		(1,093	)
Deferred tax assets, net of valuation allowance		2,908			4,464
Deferred tax liabilities:
Deductible goodwill		2,020			1,492
Nondeductible intangible assets		2,677			3,194
Prepaid assets		781			538
Capitalized software development		2,910			2,253
Deferred revenue		—			220
Depreciation		341			223
Basis difference on investments		533			559
Total deferred tax liabilities		9,262			8,479
Net deferred tax liabilities	$	(6,354	)	$	(4,015	)

12. STOCK BASED COMPENSATION

Stock Incentive Plans

The Company’s 2010 Stock Incentive Plan (2010 Plan) and 2000 Stock Incentive Plan (2000 Plan; collectively, the 2010 Plan and the 2000 Plan referred to as the Plan) authorize the grant of options, restricted share units (RSU), or other forms of stock based compensation to employees, officers, directors and others, and such grants must be approved by the Compensation Committee of the Board of Directors. Options granted under the Plan have terms of no more than ten years, with certain restrictions. The Plan allows the Compensation Committee of the Board of Directors to determine the vesting period and parameters of each grant. The vesting period of the options and RSUs granted has historically ranged from immediate vesting to annual vesting up to four years, beginning one year after the grant date. As of December 31, 2013, approximately 813,000 shares of unissued common stock remained reserved for future stock incentive grants under the Plan. The Company issues new shares of common stock when options are exercised or when RSUs become vested.

50

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. STOCK BASED COMPENSATION (continued)

Stock Option Activity

A summary of activity and various other information relative to stock options for the year ended December 31, 2013 is presented in the tables below (in thousands, except exercise price).

				Weighted-
	Common			Average		Aggregate
	Shares			Exercise Price		Intrinsic Value
Outstanding at beginning of period		1,914		$	4.29
Granted		—			—
Exercised		(1,073	)		3.15
Expired		—			—
Forfeited		(4	)		6.11
Outstanding at end of period		837		$	5.73	$	22,514
Exercisable at end of period		594		$	5.06	$	16,375

The aggregate intrinsic value for stock options in the table above represents the total difference between the Company’s closing stock price on December 31, 2013 (the last trading day of the year) of $32.63 and the option exercise price, multiplied by the number of in-the-money options as of December 31, 2013. The weighted average remaining contractual term of options outstanding at December 31, 2013 was 3.8 years. Options exercisable at December 31, 2013 have a weighted average remaining contractual term of 3.4 years.

Other information relative to option activity during the three years ended December 31, 2013 is as follows (in thousands, except weighted average grant date fair value):

	2013		2012		2011
Weighted average grant date fair value of stock options granted	$	—	$	—	$	4.67
Total grant date fair value of stock options vested	$	723	$	878	$	644
Total intrinsic value of stock options exercised	$	25,846	$	4,992	$	4,539
Cash proceeds from exercise of stock options	$	3,318	$	823	$	1,242

Restricted Share Unit Activity

A summary of activity relative to RSUs for the year ended December 31, 2013 is follows (in thousands, except weighted average grant date fair value):

	Number of RSU’s			Weighted- Average Grant Date Fair Value		Aggregate Intrinsic Value
Outstanding at beginning of period		73		$	23.22
Granted		80			22.02
Vested		(16	)		23.07
Forfeited		—			—
Outstanding at end of period		137		$	22.53	$	4,466

The aggregate fair value of RSU awards that vested in 2013, as of the respective vesting dates, was approximately $345,000. A portion of RSUs that vested in 2013 were net-share settled such that the Company withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld for RSUs during 2013 were 2,210, and were based on the value of the RSUs on their respective vesting dates as determined by the Company’s closing stock price. One stock option exercise was net-share settled during 2013, resulting in 7,606 shares withheld for settlement of employee tax obligations. Total payments related to RSUs and stock options for the employees’ tax obligations to taxing authorities were approximately $164,000 in 2013, and are reflected as a financing activity within the Consolidated Statements of Cash Flows. These net-share settlements had the effect of share repurchases by the Company as they reduced and retired the number of shares that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company.

51

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. STOCK BASED COMPENSATION (continued)

Stock Based Compensation

Total stock based compensation expense recorded for the three years ended December 31, 2013, which is recorded in our statements of income, is as follows (in thousands):

	Years Ended December 31,
	2013		2012		2011
Cost of revenues (excluding depreciation and amortization)	$	81	$	45	$	41
Product development		144		133		179
Sales and marketing		175		151		104
Other general and administrative		1,058		807		464
Total stock based compensation expense	$	1,458	$	1,136	$	788

The Company amortizes the fair value of all stock based awards, net of estimated forfeitures, on a straight-line basis over the requisite service period, which generally is the vesting period. As of December 31, 2013, total unrecognized compensation expense related to non-vested stock options and RSU’s was approximately $2.5 million, net of estimated forfeitures, with a weighted average expense recognition period remaining of 2.3 years. The Company realized approximately $3.7 million of excess tax benefits during the year ended December 31, 2013, which was recorded as an increase to common stock.

Stock based compensation cost for RSU’s is measured based on the closing fair market value of the Company’s stock on the date of grant. Stock based compensation cost for stock options is estimated at the grant date based on the fair value calculated using the Black-Scholes method. The Company did not grant any stock options during 2013 or 2012. The ranges of assumptions used for determining the estimated fair value of stock options during 2011 were as follows:

Risk-free interest rate	1.05 – 2.39%
Expected dividend yield	0.0%
Expected life (in years)	5 to 7
Expected forfeiture rate	0-5%
Volatility	50%

Risk-free interest rate is based on the U.S. Treasury rate in effect at the time of the option grant having a term equivalent to the expected life of the option.

Expected dividend yield is zero because the Company has not made any dividend payments in its history and does not plan to pay dividends in the foreseeable future.

Expected life is the period of time the option is expected to remain outstanding, and is based on historical experience. The contractual option life ranges from eight to ten years. The Company estimated the expected life of options granted to members of management to be five years and seven years for directors.

Expected forfeiture rate is the estimated percentage of options granted that are not expected to become fully vested. This estimate is based on historical experience, and will be adjusted as necessary to match the actual forfeiture experience.

Volatility is the measure of the amount by which the price is expected to fluctuate. The Company estimated volatility based on the actual historical volatility of the Company’s common stock, and management believes future volatility will be similar to the Company’s historical volatility experience.

52

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. EMPLOYEE BENEFIT PLAN

401(k) Plan

The Company has a defined-contribution employee benefit plan (401(k) Plan) incorporating provisions of Section 401(k) of the Internal Revenue Code. Employees must have attained the age of 21 and have completed thirty days of service to be eligible to participate in the 401(k) Plan. Under the provisions of the 401(k) Plan, a plan member may make contributions, on a tax-deferred basis, not to exceed 20% of compensation, subject to IRS limitations. The Company has not provided matching contributions through December 31, 2013.

14. DEBT

At December 31, 2013 and 2012, the Company had no debt outstanding.

Revolving Credit Facility

The Company maintains a Loan Agreement (the “Revolving Credit Facility”) with SunTrust Bank (“SunTrust”) in the aggregate principal amount of $20.0 million, which matures on July 21, 2014. The obligations under the revolving credit facility are guaranteed by each of the Company’s subsidiaries. The Company’s borrowings under the revolving credit facility bear interest at the 30-Day LIBOR Rate plus a margin of either 175 or 200 basis points determined in accordance with a pricing grid. Principal is payable in full on the maturity date. The Company is required to pay a commitment fee of 25 basis points per annum of the average daily unused portion of the revolving credit facility.

The purpose of the revolving credit facility is for general working capital needs, permitted acquisitions (as defined in the Loan Agreement), and for stock repurchase and/or redemption transactions that the Company may authorize.

The revolving credit facility contains certain covenants that, among other things, restrict additional indebtedness, liens and encumbrances, changes to the character of the Company’s business, acquisitions, asset dispositions, mergers and consolidations, sale or discount of receivables, creation or acquisitions of additional subsidiaries, and other matters customarily restricted in such agreements.

In addition, the revolving credit facility requires the Company to meet certain financial tests, including, without limitation:

• a maximum total leverage ratio (consolidated debt/consolidated EBITDA) of 2.0 to 1.0;

• funded debt to total capitalization may not exceed 40%; and

• tangible net worth may not be less than $1.00

As of December 31, 2013, the Company believes it was in compliance with all covenants. There were no balances outstanding on the revolving credit facility as of December 31, 2013.

15. LEASES

The Company has non-cancellable operating leases primarily for office space and office equipment. Some lease agreements contain provisions for escalating rent payments over the initial terms of the lease. The Company accounts for these leases by recognizing rent expense on a straight-line basis and adjusting the deferred rent expense liability for the difference between the straight-line rent expense and the amount of rent paid. The Company also leases certain office equipment under operating leases. Total rent expense under all operating leases was approximately $2.4 million, $2.2 million, and $1.9 million, for the years ended December 31, 2013, 2012, and 2011, respectively.

Future rental payment commitments at December 31, 2013 under non-cancelable operating leases, with initial terms of one year or more, are as follows (in thousands):

2014	$	2,665
2015		2,062
2016		1,359
2017		446
2018		59
Thereafter		—
Total minimum lease payments	$	6,591

53

HEALTHSTREAM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

16. LITIGATION

In the ordinary course of business, the Company is from time to time involved in various pending legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon the financial condition and/or results of operations of the Company. However, in the opinion of the Company’s management, matters currently pending or threatened against the Company are not expected to have a material adverse effect on the financial position or results of operations of the Company.

17. SUBSEQUENT EVENT

On March 3, 2014, the Company acquired all of the stock of Health Care Compliance Strategies, Inc. (HCCS) a Jericho, New York based company that specializes in healthcare compliance solution and services. The Company acquired HCCS to further advance its suite of workforce development solutions, including its offering of compliance solutions. The consideration paid for HCCS consisted of approximately $13.0 million in cash, subject to a post-closing working capital adjustment, and 81,614 shares of our common stock. The Company may make additional payments of up to $750,000, contingent upon achievement of certain performance milestones post-closing.

54

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

HealthStream’s chief executive officer and principal financial officer have reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of December 31, 2013. Based on that evaluation, the chief executive officer and principal financial officer have concluded that HealthStream’s disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and the information required to be disclosed in the reports the Company files or submits under the Exchange Act was accumulated and communicated to the Company’s management, including its principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Management’s Annual Report On Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, and for assessing the effectiveness of internal control over financial reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The Company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of our internal control over financial reporting. Management believes that, as of December 31, 2013, the Company’s internal control over financial reporting was effective based on those criteria. The Company’s independent registered public accounting firm, Ernst & Young LLP, has issued an audit report on the Company’s internal control over financial reporting, which appears in Item 8 of this Annual Report on Form 10-K.

Changes in Internal Control Over Financial Reporting

There were no changes in HealthStream’s internal control over financial reporting that occurred during the fourth quarter of 2013 that have materially affected, or that are reasonably likely to materially affect, HealthStream’s internal control over financial reporting.

Item 9B. Other Information

None.

55

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Information as to directors of the Company and corporate governance is incorporated by reference from the information contained in our 2014 proxy statement for the 2014 Annual Meeting of Shareholders (2014 Proxy Statement) that we will file with the Securities and Exchange Commission within 120 days of the end of the fiscal year to which this report relates. Pursuant to General Instruction G(3), certain information concerning executive officers of the Company is included in Part I of this Form 10-K, under the caption “Executive Officers of the Registrant.”

Item 11. Executive Compensation

Incorporated by reference from the information contained in the Company’s 2014 Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Incorporated by reference from the information contained in the Company’s 2014 Proxy Statement.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Incorporated by reference from the information contained in the Company’s 2014 Proxy Statement.

Item 14. Principal Accounting Fees and Services

Incorporated by reference from the information contained in the Company’s 2014 Proxy Statement.

56

PART IV

Item 15. Exhibits, Financial Statement Schedules

(a)(1) Financial Statements

Reference is made to the financial statements included in Item 8 to this Report on Form 10-K.

(a)(2) Financial Statement Schedules

All schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or the notes thereto.

(a)(3) Exhibits

Number	Description
2.1 (1)	Stock Purchase Agreement, dated as of March 28, 2005, by and among HealthStream, Inc., Mel B. Thompson and Data Management & Research, Inc.
2.2 (2)	Stock Purchase Agreement, dated as of March 12, 2007, by and among HealthStream, Inc., The Jackson Organization, Research Consultants, Inc., David Jackson and the Jackson Charitable Remainder Trust
3.1*	Form of Fourth Amended and Restated Charter of HealthStream, Inc.
3.2*	Form of Amended and Restated Bylaws of HealthStream, Inc.
4.1*	Form of certificate representing the common stock, no par value per share, of HealthStream, Inc.
4.2*	Reference is made to Exhibits 3.1 and 3.2.
10.1^*	2000 Stock Incentive Plan, effective as of April 10, 2000
10.2^ (10)	2010 Stock Incentive Plan, effective as of May 27, 2010
10.3^*	Form of Indemnification Agreement
10.4^ (3)	Executive Employment Agreement, dated July 21, 2005, between HealthStream, Inc. and Robert A. Frist, Jr.
10.5^ (4)	Form of HealthStream, Inc. Non-Qualified Stock Option Agreement (Employees)
10.6^ (4)	Form of HealthStream, Inc. Incentive Stock Option Agreement (Employees)
10.7^ (4)	Form of HealthStream, Inc. Non-Qualified Stock Option Agreement (Directors)
10.8^ (5)	Form of HealthStream, Inc. Restricted Share Unit Agreement (Officers)
10.9^ (5)	Form of HealthStream, Inc. Restricted Share Unit Agreement (Non-Employee Director)
10.10 (6)	Loan Agreement dated July 21, 2006 between HealthStream, Inc. and SunTrust Bank
10.11 (7)	First Amendment to Loan Agreement dated February 16, 2007 between HealthStream, Inc. and SunTrust Bank
10.12 (8)	Second Amendment to Loan Agreement dated July 23, 2007 between HealthStream, Inc. and SunTrust Bank
10.13 (9)	Third Amendment to Loan Agreement dated July 17, 2009 between HealthStream, Inc. and SunTrust Bank
10.14 (11)	Fourth Amendment to Loan Agreement dated March 30, 2011 between HealthStream, Inc. and SunTrust Bank
10.15 (12)	Fifth Amendment to Loan Agreement dated July 19, 2012 between HealthStream, Inc. and SunTrust Bank
10.16^	Summary of Director and Executive Officer Compensation
21.1	Subsidiaries of HealthStream, Inc.
23.1	Consent of Independent Registered Public Accounting Firm
31.1	Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.1 INS	XBRL Instance Document
101.1 SCH	XBRL Taxonomy Extension Schema
101.1 CAL	XBRL Taxonomy Extension Calculation Linkbase
101.1 DEF	XBRL Taxonomy Extension Definition Linkbase
101.1 LAB	XBRL Taxonomy Extension Label Linkbase
101.1 PRE	XBRL Taxonomy Extension Presentation Linkbase
*	Incorporated by reference to Registrant’s Registration Statement on Form S-1, as amended (Reg. No. 333-88939).
^	Management contract or compensatory plan or arrangement
(1)	Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated March 29, 2005.
(2)	Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated March 12, 2007.
(3)	Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated July 25, 2005.
(4)	Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated June 1, 2010.
(5)	Incorporated by reference from exhibit filed on our Quarterly Report on Form 10-Q, dated March 31, 2012.
(6)	Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated July 25, 2006.
(7)	Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated February 20, 2007.
(8)	Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated July 24, 2007.
(9)	Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated July 17, 2009.
(10)	Incorporated by reference to Appendix B of the Company’s Definitive Proxy Statement filed with the SEC on April 29, 2010.
(11)	Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated March 30, 2011.
(12)	Incorporated by reference from exhibit field on our Current Report on Form 8-K, dated July 20, 2012.

57

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 4^th day of March, 2014.

HEALTHSTREAM, INC.
By:	/s/ ROBERT A. FRIST, JR.
	Robert A. Frist, Jr. Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated:

Signature	Title(s)	Date
/S/ ROBERT A. FRIST, JR. Robert A. Frist, Jr.	President, Chief Executive Officer and Chairman (Principal Executive Officer)	March 4, 2014
/S/ GERARD M. HAYDEN, JR. Gerard M. Hayden, Jr.	Chief Financial Officer and Senior Vice President (Principal Financial and Accounting Officer)	March 4, 2014
/S/ THOMPSON DENT Thompson Dent	Director	March 4, 2014
/S/ FRANK GORDON Frank Gordon	Director	March 4, 2014
/S/ C. MARTIN HARRIS C. Martin Harris	Director	March 4, 2014
/S/ JEFFREY L. MCLAREN Jeffrey L. McLaren	Director	March 4, 2014
/S/ DALE POLLEY Dale Polley	Director	March 4, 2014
/S/ LINDA REBROVICK Linda Rebrovick	Director	March 4, 2014
/S/ MICHAEL SHMERLING Michael Shmerling	Director	March 4, 2014
/S/ WILLIAM STEAD William Stead	Director	March 4, 2014
/S/ DEBORAH TAYLOR TATE Deborah Taylor Tate	Director	March 4, 2014

58

INDEX TO EXHIBITS

Exhibit Number	Description
2.1 (1)	Stock Purchase Agreement, dated as of March 28, 2005, by and among HealthStream, Inc., Mel B. Thompson and Data Management & Research, Inc.
2.2 (2)	Stock Purchase Agreement, dated as of March 12, 2007, by and among HealthStream, Inc., The Jackson Organization, Research Consultants, Inc., David Jackson and the Jackson Charitable Remainder Trust
3.1*	Form of Fourth Amended and Restated Charter of HealthStream, Inc.
3.2*	Form of Amended and Restated Bylaws of HealthStream, Inc.
4.1*	Form of certificate representing the common stock, no par value per share, of HealthStream, Inc.
4.2*	Reference is made to Exhibits 3.1 and 3.2.
10.1^*	2000 Stock Incentive Plan, effective as of April 10, 2000
10.2^ (10)	2010 Stock Incentive Plan, effective as of May 27, 2010
10.3^*	Form of Indemnification Agreement
10.4^ (3)	Executive Employment Agreement, dated July 21, 2005, between HealthStream, Inc. and Robert A. Frist, Jr.
10.5^ (4)	Form of HealthStream, Inc. Non-Qualified Stock Option Agreement (Employees)
10.6^ (4)	Form of HealthStream, Inc. Incentive Stock Option Agreement (Employees)
10.7^ (4)	Form of HealthStream, Inc. Non-Qualified Stock Option Agreement (Directors)
10.8^ (5)	Form of HealthStream, Inc. Restricted Share Unit Agreement (Officers)
10.9^ (5)	Form of HealthStream, Inc. Restricted Share Unit Agreement (Non-Employee Director)
10.10 (6)	Loan Agreement dated July 21, 2006 between HealthStream, Inc. and SunTrust Bank
10.11 (7)	First Amendment to Loan Agreement dated February 16, 2007 between HealthStream, Inc. and SunTrust Bank
10.12 (8)	Second Amendment to Loan Agreement dated July 23, 2007 between HealthStream, Inc. and SunTrust Bank
10.13 (9)	Third Amendment to Loan Agreement dated July 17, 2009 between HealthStream, Inc. and SunTrust Bank
10.14 (11)	Fourth Amendment to Loan Agreement dated March 30, 2011 between HealthStream, Inc. and SunTrust Bank
10.15 (12)	Fifth Amendment to Loan Agreement dated July 19, 2012 between HealthStream, Inc. and SunTrust Bank
10.16^	Summary of Director and Executive Officer Compensation
21.1	Subsidiaries of HealthStream, Inc.
23.1	Consent of Independent Registered Public Accounting Firm
31.1	Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.1 INS	XBRL Instance Document
101.1 SCH	XBRL Taxonomy Extension Schema
101.1 CAL	XBRL Taxonomy Extension Calculation Linkbase
101.1 DEF	XBRL Taxonomy Extension Definition Linkbase
101.1 LAB	XBRL Taxonomy Extension Label Linkbase
101.1 PRE	XBRL Taxonomy Extension Presentation Linkbase
*	Incorporated by reference to Registrant’s Registration Statement on Form S-1, as amended (Reg. No. 333-88939).
^	Management contract or compensatory plan or arrangement
(1)	Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated March 29, 2005.
(2)	Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated March 12, 2007.
(3)	Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated July 25, 2005.
(4)	Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated June 1, 2010.
(5)	Incorporated by reference from exhibit filed on our Quarterly Report on Form 10-Q, dated March 31, 2012.
(6)	Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated July 25, 2006.
(7)	Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated February 20, 2007.
(8)	Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated July 24, 2007.
(9)	Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated July 17, 2009.
(10)	Incorporated by reference to Appendix B of the Company’s Definitive Proxy Statement filed with the SEC on April 29, 2010.
(11)	Incorporated by reference from exhibit filed on our Current Report on Form 8-K, dated March 30, 2011.
(12)	Incorporated by reference from exhibit field on our Current Report on Form 8-K, dated July 20, 2012.

EX-10.16

EXHIBIT 10.16

HealthStream, Inc. (the “Company”)

Summary of Director and Executive Officer Compensation

I. Director Compensation. Directors who are employees of the Company do not receive additional compensation for serving as directors of the Company. The following table sets forth current rates of cash compensation for the Company’s non-employee directors.

Retainers and Fees	2014
Annual Retainer fee	$	4,000
Board meeting fee	$	1,000
Committee chair meeting fee	$	1,000
Committee member meeting fee	$	500

In addition to the cash compensation set forth above, each non-employee director is eligible to receive a nondiscretionary annual grant of restricted share units for conversion to shares of the Company’s common stock. The restricted share units are granted annually and vest ratably over a three year period.

II. Executive Officer Compensation. The following table sets forth the current base salaries and fiscal 2013 performance bonuses provided to our executive officers, including the individuals who the Company expects to be its Named Executive Officers for 2014.

Executive Officer	Current Base Salary		Fiscal 2013 Bonus Amount
Robert A. Frist, Jr.	$	269,850	$	35,209
J. Edward Pearson	$	256,200	$	33,428
Arthur E. Newman	$	245,700	$	32,058
Gerard M. Hayden, Jr.	$	241,500	$	31,510
Jeffrey S. Doster	$	241,500	$	31,510
Michael Sousa	$	202,125	$	8,750

III. Additional Information. The foregoing information is summary in nature. Additional information regarding Director and Named Executive Officer compensation will be contained in the Company’s 2014 Proxy Statement.

EX-21.1

EXHIBIT 21.1

SUBSIDIARIES OF HEALTHSTREAM, INC.

Names Under Which We Do Business	State or Other Jurisdiction of Incorporation or Organization
Data Management & Research, Inc.	Tennessee
The Jackson Organization, Research Consultants, Inc.	Maryland
Decision Critical, Inc.	Texas
Sy.Med Development, Inc.	Tennessee
Health Care Compliance Strategies, Inc.	New York
HealthStream Acquisition I, Inc.	Tennessee
HealthStream Acquisition II, Inc.	Tennessee

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the following Registration Statements:

(1) Registration Statement (Form S-8 No. 333-167241) pertaining to the 2010 Stock Incentive Plan of HealthStream, Inc.,

(2) Registration Statement (Form S-8 No. 333-37440) pertaining to the 1994 Employee Stock Option Plan, 2000 Stock Incentive Plan and Employee Stock Purchase Plan of HealthStream, Inc.,

(3) Registration Statement (Form S-3 No. 333-175863) of HealthStream, Inc.;

of our reports dated March 4, 2014, with respect to the consolidated financial statements of HealthStream, Inc., and the effectiveness of internal control over financial reporting of HealthStream, Inc., included in this Annual Report (Form 10-K) of HealthStream, Inc. for the year ended December 31, 2013.

/s/ Ernst & Young LLP

Nashville, Tennessee

March 4, 2014

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Robert A. Frist, Jr., certify that:

1. I have reviewed this annual report on Form 10-K of HealthStream, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 4, 2014	/s/ ROBERT A. FRIST, JR.
	Robert A. Frist, Jr.
	Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Gerard M. Hayden, Jr., certify that:

1. I have reviewed this annual report on Form 10-K of HealthStream, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 4, 2014	/s/ GERARD M. HAYDEN, JR.
	Gerard M. Hayden, Jr. Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of HealthStream, Inc. (the “Company”) on Form 10-K for the year ending December 31, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Robert A. Frist, Jr., Chief Executive Officer of the Company certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ ROBERT A. FRIST, JR.

Robert A. Frist, Jr.

Chief Executive Officer

March 4, 2014

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of HealthStream, Inc. (the “Company”) on Form 10-K for the year ending December 31, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Gerard M. Hayden, Jr., Chief Financial Officer of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ GERARD M. HAYDEN, JR.

Gerard M. Hayden, Jr.

Chief Financial Officer

March 4, 2014

XML

Earnings Per Share - Computation of Basic and Diluted Earnings Per Share (Detail) (USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Numerator:
Net income	$ 8,418	$ 7,645	$ 6,944
Denominator:
Weighted-average shares outstanding	26,853	26,128	22,445
Effect of dilutive shares	810	1,379	1,303
Weighted-average diluted shares	27,663	27,507	23,748
Basic earnings per share	$ 0.31	$ 0.29	$ 0.31
Diluted earnings per share	$ 0.30	$ 0.28	$ 0.29

XML

Income Taxes - Additional Information (Detail) (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Income Taxes Disclosure [Line Items]
Valuation allowance	$ 1,325,000	$ 1,093,000
Valuation allowance, remaining amount	1,100,000
Description of operating loss carryforward expiration period	Years 2014 through 2024
Net operating loss carryforwards attributable to the exercise of stock options	1,100,000
Research and development tax credit carryforward expiration year	2033
Alternative minimum tax credit carryforward	592,000
Federal income tax payment	28,000	189,000	194,000
State income tax payment	343,000	238,000	193,000
Unrecognized tax benefits	167,000
U.S. federal tax examinations, start	2009
U.S. federal tax examinations, end	2013
Unrecognized Tax Benefits that Would Impact Effective Tax Rate	0
Federal [Member]
Income Taxes Disclosure [Line Items]
Net operating loss carryforwards	18,300,000
State [Member]
Income Taxes Disclosure [Line Items]
Net operating loss carryforwards	13,900,000
Research and Development [Member]
Income Taxes Disclosure [Line Items]
Research and development tax credit carryforward	$ 393,000

XML

Collaborative Arrangement - Additional Information (Detail) (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Collaborative Arrangements and Non-collaborative Arrangement Transactions [Line Items]
Payments associated with capitalized software development	$ 4,267,000	$ 4,435,000	$ 6,065,000
Collaborative Arrangement [Member]
Collaborative Arrangements and Non-collaborative Arrangement Transactions [Line Items]
Profits or losses received from collaborative arrangement	50.00%
Revenues related to collaborative arrangement	2,300,000	1,700,000
Expenses related to collaborative arrangement	2,300,000	1,700,000
Collaborative Arrangement [Member] | SimVentures [Member]
Collaborative Arrangements and Non-collaborative Arrangement Transactions [Line Items]
Payments associated with capitalized software development	$ 900,000	$ 1,300,000

XML

Income Taxes - Reconciliation of the Beginning and Ending liability for Gross Unrecognized Tax Benefits (Detail) (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Income Tax Disclosure [Abstract]
Balance at beginning of year
Additions for tax positions in the current year	167,000
Balance at end of year	$ 167,000

XML

Intangible Assets - Identifiable Intangible Assets (Detail) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Finite-Lived Intangible Assets [Line Items]
Gross Amount	$ 20,259	$ 18,841
Accumulated Amortization	(11,389)	(10,036)
Total	8,870	8,805
Customer Related [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Amount	16,889	15,619
Accumulated Amortization	(10,145)	(8,969)
Total	6,744	6,650
Other [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Amount	3,370	3,222
Accumulated Amortization	(1,244)	(1,067)
Total	$ 2,126	$ 2,155

XML

Stock Based Compensation (Tables)

12 Months Ended

Dec. 31, 2013

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Summary of Activity and Various Other Information Relative to Stock Options

A summary of activity and various other information relative to stock options for the year ended December 31, 2013 is presented in the tables below (in thousands, except exercise price).

				Weighted-
	Common			Average		Aggregate
	Shares			Exercise Price		Intrinsic Value
Outstanding at beginning of period		1,914		$	4.29
Granted		—			—
Exercised		(1,073	)		3.15
Expired		—			—
Forfeited		(4	)		6.11
Outstanding at end of period		837		$	5.73	$	22,514
Exercisable at end of period		594		$	5.06	$	16,375

Other Information Relative to Option Activity

Other information relative to option activity during the three years ended December 31, 2013 is as follows (in thousands, except weighted average grant date fair value):

	2013		2012		2011
Weighted average grant date fair value of stock options granted	$	—	$	—	$	4.67
Total grant date fair value of stock options vested	$	723	$	878	$	644
Total intrinsic value of stock options exercised	$	25,846	$	4,992	$	4,539
Cash proceeds from exercise of stock options	$	3,318	$	823	$	1,242

Summary of Activity Relative to RSU's

A summary of activity relative to RSUs for the year ended December 31, 2013 is follows (in thousands, except weighted average grant date fair value):

	Number of RSU’s			Weighted- Average Grant Date Fair Value		Aggregate Intrinsic Value
Outstanding at beginning of period		73		$	23.22
Granted		80			22.02
Vested		(16	)		23.07
Forfeited		—			—
Outstanding at end of period		137		$	22.53	$	4,466

Stock Based Compensation Expense Recorded in Condensed Consolidated Statements of Income

Total stock based compensation expense recorded for the three years ended December 31, 2013, which is recorded in our statements of income, is as follows (in thousands):

	Years Ended December 31,
	2013		2012		2011
Cost of revenues (excluding depreciation and amortization)	$	81	$	45	$	41
Product development		144		133		179
Sales and marketing		175		151		104
Other general and administrative		1,058		807		464
Total stock based compensation expense	$	1,458	$	1,136	$	788

Fair Value of Stock Options Granted, Assumptions

The ranges of assumptions used for determining the estimated fair value of stock options during 2011 were as follows:

Risk-free interest rate	1.05 – 2.39%
Expected dividend yield	0.0%
Expected life (in years)	5 to 7
Expected forfeiture rate	0-5%
Volatility	50%

XML

Income Taxes - Significant Components of Deferred Tax Assets and Deferred Tax Liabilities (Detail) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Deferred tax assets:
Allowance for doubtful accounts	$ 84	$ 57
Accrued liabilities	1,225	463
Tax credits	702	902
Stock based compensation	966	650
Net operating loss carryforwards	1,256	3,485
Total deferred tax assets	4,233	5,557
Less: Valuation allowance	(1,325)	(1,093)
Deferred tax assets, net of valuation allowance	2,908	4,464
Deferred tax liabilities:
Deductible goodwill	2,020	1,492
Nondeductible intangible assets	2,677	3,194
Prepaid assets	781	538
Capitalized software development	2,910	2,253
Deferred revenue		220
Depreciation	341	223
Basis difference on investments	533	559
Total deferred tax liabilities	9,262	8,479
Net deferred tax liabilities	$ (6,354)	$ (4,015)

XML

Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2013

Accounting Policies [Abstract]

Reporting Entity and Segments

Reporting Entity and Segments

HealthStream, Inc. (the “Company”) was incorporated in 1990 as a Tennessee corporation and is headquartered in Nashville, Tennessee. We operate our business in two segments: HealthStream Workforce Development Solutions and HealthStream Research/Patient Experience Solutions. Our Workforce Development products consist of SaaS-based services and subscription-based solutions to meet the ongoing training, certification, assessment and development needs of the healthcare community. These solutions provide, deliver and track computer based education for our customers in the United States through our software-as-a-service (SaaS) model. HealthStream Research/Patient Experience products offer healthcare organizations a wide range of quality and satisfaction surveys, consulting services, analyses of survey results, and other research-based services.

Recognition of Revenue

Recognition of Revenue

Revenues are derived from providing services through our SaaS-based workforce development platform products, courseware subscriptions, provision of survey and research services, professional services, content maintenance, custom courseware development and other education and training services.

The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when persuasive evidence of an arrangement exists, prices are fixed or determinable, services and products are provided to the customer and collectability is probable or reasonably assured.

Revenue recognized from software and other arrangements is allocated to each element of the arrangement based on the relative fair values of the elements. While elements include software products and post contract customer support, the fair value of each element is based on objective evidence specific to the vendor. If fair value cannot be determined for each element of the arrangement, all revenue from the arrangement is deferred until fair value can be determined or until all elements of the arrangement are delivered and customer acceptance has occurred. Sales of the Company’s SaaS-based workforce development platform products include customer support, implementation services, and training; therefore all revenues are deferred until the SaaS-based product is implemented, at which time revenues are recognized ratably over the subscription service period. In the event that circumstances occur, which give rise to uncertainty regarding the collectibility of contracted amounts, revenue recognition is suspended until such uncertainty is resolved. Fees for these services are billed on either a monthly, quarterly, or annual basis.

Revenues derived from the delivery of services through the Company’s SaaS-based workforce development platform products and courseware subscriptions are recognized ratably over the term of the subscription service agreement or over the historical usage period, if usage typically differs from the subscription period. Other training revenues are generally recognized upon the completion of training.

Revenues derived from the license of installed software products, associated with the Sy.Med products, are recognized upon shipment or installation of the software. Software support and maintenance revenues are recognized ratably over the term of the related agreement.

Revenues recognized from the Company’s survey and research services are determined using both the proportional performance method and the completed contract method. Revenues are generally earned over the estimated survey cycle, which typically ranges from less than one month to up to five months. The survey cycle is generally initiated based on the receipt of the first survey response and runs through provision of related survey reports to the customer. If survey results are not available to the customer during the survey fielding cycle, revenues are recognized at time of report delivery. Revenues for coaching and consulting engagements are recognized using the proportional performance method over the term of the underlying contract. Fees for survey services are billed upon initiation of the survey cycle, with progress billings made throughout the survey cycle. Fees for coaching and consulting engagements are billed upon initiation of the engagement with progress billings throughout the term of the contract.

Revenues from professional services, content maintenance, and custom courseware development services are recognized using a percentage of completion method based on labor hours, which correspond to the completion of performance milestones and deliverables. All other revenues are recognized as the related services are performed or products are delivered. Fees for these services are generally billed at project initiation and upon completion of various milestones.

Principles of Consolidation

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates and such differences could be material to the consolidated financial statements.

Cash Equivalents

Cash Equivalents

The Company considers cash equivalents to be unrestricted, highly liquid investments with initial maturities of less than three months.

Marketable Securities

Marketable Securities

Marketable securities are classified as available for sale and are stated at fair market value, with the unrealized gains and losses, net of tax, reported in other comprehensive income (loss) on the accompanying consolidated balance sheets. Realized gains and losses and declines in market value judged to be other than temporary on investments in marketable securities are included in interest and other income on the accompanying consolidated statements of income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available for sale are included in other income (expense) on the accompanying consolidated statements of income. Premiums and discounts are amortized over the life of the related available for sale security as an adjustment to yield using the effective interest method.

Accounts Receivable-Unbilled

Accounts Receivable-Unbilled

Accounts receivable-unbilled represents the following: 1) revenue earned and recognized on contracts accounted for using the proportional performance method for which invoices have not been generated or contractual billing dates have not been reached; and 2) the difference between billings for contracts containing escalated pricing over the term of the agreement and the recognition of revenue ratably over the subscription period.

Deferred Revenue

Deferred Revenue

Deferred revenue represents amounts, which have been billed or collected in advance of revenue recognition, and is recognized as the revenue recognition criteria are met. The Company typically invoices customers in quarterly, bi-annual, or annual installments.

Prepaid Royalties

Prepaid Royalties

Prepaid royalties represents advance payments associated with the sale of third party products, such as courseware subscriptions. Royalties are typically paid in advance at the commencement of the revenue cycle, or periodically throughout the revenue cycle, such as quarterly, bi-annual, or annual installments. Royalty payments are amortized over the term of the underlying contracts, which generally range from 12 to 36 months, in order to match the direct royalty costs to the same period the subscription revenue is recognized. Amortization of royalties is included under the caption “cost of revenues (excluding depreciation and amortization)” in the accompanying consolidated statements of income.

Allowance for Doubtful Accounts

Allowance for Doubtful Accounts

The Company estimates its allowance for doubtful accounts using a specific identification method. Management determines the allowance for doubtful accounts on a case-by-case basis, based on the facts and circumstances surrounding each potentially uncollectible receivable. An allowance is also maintained for accounts that are not specifically identified that may become uncollectible in the future. Uncollectible receivables are written-off in the period management believes it has exhausted every opportunity to collect payment from the customer. Bad debt expense is recorded when events or circumstances indicate an additional allowance is required based on the Company’s specific identification approach.

Changes in the allowance for doubtful accounts and the amounts charged to bad debt expense for the years ended December 31, were as follows (in thousands):

	Allowance Balance at Beginning of Period		Charged to Costs and Expenses		Write-offs			Allowance Balance at End of Period
2013	$	142	$	115	$	(46	)	$	211
2012	$	149	$	120	$	(127	)	$	142
2011	$	157	$	50	$	(58	)	$	149

Capitalized Software Development

Capitalized Software Development

Capitalized software development is stated on the basis of cost, and is presented net of accumulated amortization. The Company capitalizes costs incurred during the software development phase for projects when such costs are material. These assets are amortized using the straight-line method, generally ranging between one to five years. The Company capitalized approximately $4.3 million and $4.4 million during 2013 and 2012, respectively. Maintenance and operating costs are expensed as incurred. As of December 31, 2013 and 2012, there were no capitalized internal development costs for computer software developed for resale.

Fair Value Measurements

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the inputs to valuation techniques used in measuring fair value. There are three levels to the fair value hierarchy based on the reliability of inputs, as follows:

Level 1	–	Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2	–	Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3	–	Unobservable inputs in which little or no market data exists, therefore requiring the Company to develop its own assumptions.

The Company evaluates assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them for each reporting period. This determination requires significant judgments to be made by the Company.

At December 31, 2013, the fair value measurement amounts for assets consisted of marketable securities which are classified as available for sale. The carrying amounts reported in the consolidated balance sheets approximate the fair value of the Company’s marketable securities based on quoted market prices or alternative pricing sources and models utilizing market observable inputs. At December 31, 2013 and 2012, the Company did not have any financial liabilities that were subject to fair value measurements.

Property and Equipment

Property and Equipment

Property and equipment are stated on the basis of cost. Depreciation and amortization are provided on the straight-line method over the following estimated useful lives, except for assets under capital leases and leasehold improvements, which are amortized over the shorter of the estimated useful life or their respective lease term. Depreciation and amortization of property and equipment totaled $3.3 million and $2.6 million for the years ended December 31, 2013 and 2012, respectively.

	Years
Furniture and fixtures		5-10
Equipment		3-5

Goodwill and Intangible Assets

Goodwill and Intangible Assets

Goodwill represents the excess of purchase price over fair value of net tangible assets acquired. The Company evaluates goodwill for impairment at the reporting unit level by assessing whether it is more likely than not that the fair value of a reporting unit exceeds its carrying value. If this assessment concludes that is more likely than not that the fair value of a reporting unit exceeds its carrying value, then goodwill is not considered impaired and no further impairment testing is required. Conversely, if the assessment concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, a goodwill impairment test is performed to compare the fair value of the reporting unit to its carrying value. The Company determines fair value of the reporting units using both income and market based models. The Company will perform its goodwill impairment test whenever events or changes in facts or circumstances indicate that impairment may exist, and at least annually during the fourth quarter.

As of December 31, 2013 intangible assets with remaining unamortized balances include contract rights and customer relationships, internally-developed technology and patents, non-competition agreements, and trade names. These intangible assets are considered to have definite useful lives and are being amortized on a straight line basis over periods typically ranging between five and ten years. The weighted average amortization period for definite lived intangible assets as of December 31, 2013 was 8.7 years. Intangible assets are reviewed for impairment whenever events or changes in facts or circumstances indicate that the carrying amount of the assets may not be recoverable. There were no impairments identified or recorded for the years ended December 31, 2013, 2012, or 2011.

Long-Lived Assets

Long-Lived Assets

Long-lived assets to be held for use are reviewed for events or changes in facts and circumstances, both internally and externally, which may indicate that an impairment of long-lived assets held for use is present. The Company measures any impairment using observable market values or discounted future cash flows from the related long-lived assets. The cash flow estimates and discount rates incorporate management’s best estimates, using appropriate and customary assumptions and projections at the date of evaluation. Management periodically evaluates whether the carrying value of long-lived assets, including property and equipment, capitalized software development, other assets and intangible assets will be recoverable. There were no impairments identified or recorded for the years ended December 31, 2013, 2012, or 2011.

Other Assets

Other Assets

Other assets are comprised of the long-term portion of content development fees and non-marketable equity investments.

Non-Marketable Equity Investments

Non-Marketable Equity Investments

Non-marketable equity investments are accounted for using the equity method when the Company can exercise significant influence over the investee. Investments for which the Company is not able to exercise significant influence over the investee are accounted for under the cost method. The proportionate share of income or loss from equity method investments are recorded under the caption “other income (expense), net” in the accompanying consolidated statements of income.

Financial Instruments

Financial Instruments

The Company has financial instruments, including cash and cash equivalents, accounts receivable, accounts receivable-unbilled, accounts payable, accrued liabilities, and deferred revenue. The carrying amounts of these financial instruments approximate fair value because of the short term maturity or short term nature of such instruments. Marketable securities approximate fair value based on quoted market prices, see Note 4.

Income Taxes

Income Taxes

Income taxes are accounted for using the asset and liability method, whereby deferred tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities measured at tax rates that will be in effect for the year in which the differences are expected to affect taxable income. Management evaluates all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed. Future realization of the tax benefit of an existing deductible temporary difference or carryforward ultimately depends on the existence of sufficient taxable income of the appropriate character within the carryback or carryforward period available under the tax law. There are four possible sources of taxable income that may be available under the tax law to realize a tax benefit for deductible temporary differences and carryforwards: 1) future reversals of existing taxable temporary differences, 2) future taxable income exclusive of reversing temporary differences and carryforwards, 3) taxable income in prior carryback year(s) if carryback is permitted under the tax law, and 4) tax-planning strategies that would, if necessary, be implemented to realize deductible temporary differences or carryforwards prior to their expiration. Management reviews the realizability of its deferred tax assets each reporting period to identify whether any significant changes in circumstances or assumptions have occurred that could materially affect the realizability of deferred tax assets. As of December 31, 2013, the Company had established a valuation allowance of $1.3 million for the portion of its net deferred tax assets that are not more likely than not expected to be realized.

The Company accounts for income tax uncertainties using a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax positions that meet the more-likely-than-not recognition threshold are measured in order to determine the tax benefit to be recognized in the financial statements. The Company expenses any penalties or interest associated with tax obligations as general and administrative expenses and interest expense, respectively.

Other Long Term Liabilities

Other Long Term Liabilities

Other long term liabilities represent the deferred rent liability associated with an operating lease for office space in Nashville, Tennessee as well as deferred service credits (see Note 9).

Advertising

Advertising

The Company expenses the costs of advertising as incurred. Advertising expense for the years ended December 31, 2013, 2012, and 2011 was approximately $408,000, $349,000, and $251,000, respectively.

Shipping and Handling Costs

Shipping and Handling Costs

Shipping and handling costs that are associated with our products and services are included in cost of revenues.

Earnings Per Share

Earnings Per Share

Basic earnings per share is computed by dividing the net income available to common shareholders for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing the net income for the period by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares, composed of incremental common shares issuable upon the exercise of stock options, are included in diluted net income per share to the extent these shares are dilutive. Common equivalent shares that have an anti-dilutive effect on diluted net income per share have been excluded from the calculation of diluted weighted average shares outstanding for the years ended December 31, 2013, 2012, and 2011.

Concentrations of Credit Risk and Significant Customers

Concentrations of Credit Risk and Significant Customers

The Company places its temporary excess cash investments in high quality, short-term money market instruments. At times, such investments may be in excess of the FDIC insurance limits.

The Company sells its products and services to various companies in the healthcare industry that are located in the United States. We perform ongoing credit evaluations of our customers’ financial condition and generally require no collateral from customers. The Company did not have any single customer representing over 10% of net revenues during 2013, 2012, or 2011.

Stock Based Compensation

Stock Based Compensation

As of December 31, 2013, the Company maintains two stock based compensation plans, which are described in Note 12. The Company accounts for stock based compensation using the fair-value based method for costs related to share-based payments, including stock options and restricted share units. The Company uses the Black Scholes option pricing model for calculating the fair value of option awards issued under its stock based compensation plan. The Company measures compensation cost of restricted share units based on the closing fair market value of the Company’s stock on the date of grant. Stock based compensation cost is measured at the grant date, based on the fair value of the award that is ultimately expected to vest, and is recognized as an expense over the requisite service period. The Company recognizes tax benefits from stock based compensation if an excess tax benefit is realized. Excess tax benefits are recorded as an increase to common stock when realized.

Newly Issued Accounting Standards

Newly Issued Accounting Standards

In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-02), which is effective prospectively for public companies for reporting periods beginning after December 15, 2012. This new accounting standard improves the reporting of reclassifications out of accumulated other comprehensive income (AOCI) by requiring an entity to report the effect of significant reclassifications out of AOCI on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. We adopted this new guidance on January 1, 2013 and the adoption did not have a material effect on our consolidated financial statements.

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Business Segments - Business Segment Information Based on Net Revenues and Net Income from Operations (Detail) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Segment Reporting, Revenue Reconciling Item [Line Items]
Revenues, net	$ 132,274	$ 103,732	$ 82,066
Cost of revenues (excluding depreciation and amortization)	55,605	41,658	31,066
Product development	11,757	8,610	7,473
Sales and marketing	24,052	19,892	16,017
Other general and administrative	18,342	13,452	10,760
Depreciation and amortization	7,852	6,661	5,412
Income from operations	14,666	13,459	11,338
Operating Segments [Member] | Workforce Development [Member]
Segment Reporting, Revenue Reconciling Item [Line Items]
Revenues, net	103,820	78,566	58,078
Cost of revenues (excluding depreciation and amortization)	39,478	28,390	18,842
Product development	10,262	7,040	5,907
Sales and marketing	18,301	14,081	10,871
Other general and administrative	3,787	2,760	2,116
Depreciation and amortization	3,512	2,877	2,364
Income from operations	28,480	23,418	17,978
Operating Segments [Member] | Research/Patient Experience [Member]
Segment Reporting, Revenue Reconciling Item [Line Items]
Revenues, net	28,454	25,166	23,988
Cost of revenues (excluding depreciation and amortization)	16,127	13,268	12,224
Product development	1,495	1,570	1,566
Sales and marketing	5,415	5,420	4,733
Other general and administrative	1,530	1,330	1,632
Depreciation and amortization	1,068	1,179	1,194
Income from operations	2,819	2,399	2,639
Unallocated [Member]
Segment Reporting, Revenue Reconciling Item [Line Items]
Sales and marketing	336	391	413
Other general and administrative	13,025	9,362	7,012
Depreciation and amortization	3,272	2,605	1,854
Income from operations	$ (16,633)	$ (12,358)	$ (9,279)

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Marketable Securities - Additional Information (Detail) (USD $)	12 Months Ended
	Dec. 31, 2013
Amortized Cost And Fair Value Debt Securities [Abstract]
Realized gains from sale of marketable securities	$ 5,000

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Summary of Significant Accounting Policies - Estimated Useful Lives of Property and Equipment (Detail)	12 Months Ended
	Dec. 31, 2013
Minimum [Member] | Furniture and Fixtures [Member]
Property, Plant and Equipment [Line Items]
Property, plant and equipment useful life	5 years
Minimum [Member] | Equipment [Member]
Property, Plant and Equipment [Line Items]
Property, plant and equipment useful life	3 years
Maximum [Member] | Furniture and Fixtures [Member]
Property, Plant and Equipment [Line Items]
Property, plant and equipment useful life	10 years
Maximum [Member] | Equipment [Member]
Property, Plant and Equipment [Line Items]
Property, plant and equipment useful life	5 years

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Income Taxes - Summary of Provision for Income Taxes (Detail) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Income Tax Disclosure [Abstract]
Current federal	$ 2,474	$ 58	$ 163
Current state	1,444	273	214
Deferred federal	2,315	4,804	3,723
Deferred state	191	797	304
Provision for income taxes	$ 6,424	$ 5,932	$ 4,404

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Leases - Future Rental Payment Commitments under Non-Cancelable Operating Leases (Detail) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013
Leases [Abstract]
2014	$ 2,665
2015	2,062
2016	1,359
2017	446
2018	59
Thereafter
Total minimum lease payments	$ 6,591

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Stock Based Compensation - Summary of Activity Relative to RSU's (Detail) (RSUs [Member], USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2013
RSUs [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Outstanding at beginning of period, shares	73
Granted	80
Vested	(16)
Forfeited
Outstanding at end of period, shares	137
Outstanding at beginning of period, Weighted-Average Grant Date Fair Value	$ 23.22
Granted, Weighted-Average Grant Date Fair Value	$ 22.02
Vested, Weighted-Average Grant Date Fair Value	$ 23.07
Forfeited, Weighted-Average Grant Date Fair Value
Outstanding at end of period, Weighted-Average Grant Date Fair Value	$ 22.53
Aggregate intrinsic Value	$ 4,466

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Intangible Assets - Expected Annual Amortization Expense (Detail) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Goodwill And Intangible Assets Disclosure [Abstract]
2014	$ 1,569
2015	1,211
2016	1,122
2017	1,092
2018	990
Thereafter	2,886
Total	$ 8,870	$ 8,805

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Shareholders' Equity

12 Months Ended

Dec. 31, 2013

Equity [Abstract]

Shareholders' Equity

2. SHAREHOLDERS’ EQUITY

Common Stock

The Company is authorized to issue up to 75 million shares of common stock. The number of common shares issued and outstanding as of December 31, 2013 and 2012 was approximately 27.3 million and 26.2 million, respectively.

Preferred Stock

The Company is authorized to issue up to 10 million shares of preferred stock in one or more series, having the relative voting powers, designations, preferences, rights and qualifications, limitations or restrictions, and other terms as the Board of Directors may fix in providing for the issuance of such series, without any vote or action of the shareholders. During 2000, all outstanding shares of preferred stock were converted into common stock in connection with our initial public offering (IPO). There have been no shares of preferred stock outstanding since our IPO.

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Stock Based Compensation - Stock Based Compensation Expense Recorded in Condensed Consolidated Statements of Income (Detail) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock based compensation expense	$ 1,458	$ 1,136	$ 788
Cost of Revenues (Excluding Depreciation and Amortization) [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock based compensation expense	81	45	41
Product Development [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock based compensation expense	144	133	179
Sales and Marketing [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock based compensation expense	175	151	104
Other General and Administrative [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Total stock based compensation expense	$ 1,058	$ 807	$ 464

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Business Combinations - Additional Information (Detail) (USD $)				0 Months Ended				12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011	Sep. 09, 2013 Baptist Leadership Group [Member]	Dec. 31, 2013 Decision Critical, Inc. [Member]	Jun. 29, 2012 Decision Critical, Inc. [Member]	Oct. 19, 2012 Sy. Med Development, Inc. [Member]	Dec. 31, 2013 Sy. Med Development, Inc. [Member]
Business Acquisition [Line Items]
Acquisition date of assets				Sep. 09, 2013		Jun. 29, 2012		Oct. 19, 2012
Consideration paid for acquisition in cash				$ 7,400,000		$ 3,400,000	$ 7,400,000
Consideration paid for acquisition in shares				15,230		22,124	34,060
Additional consideration paid for acquisition in cash						300,000	1,500,000
Contingent upon achievement of certain financial targets and business outcome, term						3 years	2 years
Contingent payments have been paid to the DCI shareholders					146,000			625,000
Transaction costs associated with the DCI acquisition				145,000		203,000		165,000
Purchase price allocation for goodwill	35,746,000	29,299,000	21,147,000	6,300,000		2,900,000		5,400,000
Purchase price allocation for identifiable intangible assets				1,600,000		1,500,000		6,500,000
Purchase price allocation for net tangible assets				28,000		291,000		294,000
Purchase price allocation for deferred tax liabilities						456,000		2,800,000
Net tangible assets include deferred revenue book value				508,000		548,000		1,100,000
Net tangible assets include deferred revenue estimated fair value				254,000		356,000		229,000
Write-down of deferred revenue				$ 254,000		$ 192,000		$ 916,000

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Goodwill (Tables)

12 Months Ended

Dec. 31, 2013

Goodwill And Intangible Assets Disclosure [Abstract]

Summary of Changes in Carrying Amount of Goodwill

The changes in the carrying amount of goodwill for the years ended December 31, 2013 and 2012 are as follows (in thousands):

	Workforce Development		Research/Patient Experience		Total
Balance at January 1, 2013	$	11,459	$	17,840	$	29,299
Acquisition of Sy.Med Development, Inc.		133		—		133
Acquisition of Baptist Leadership Group		—		6,314		6,314
Balance at December 31, 2013	$	11,592	$	24,154	$	35,746
	Workforce Development		Research/Patient Experience		Total
Balance at January 1, 2012	$	3,307	$	17,840	$	21,147
Acquisition of Sy.Med Development, Inc.		5,291		—		5,291
Acquisition of Decision Critical, Inc.		2,861		—		2,861
Balance at December 31, 2012	$	11,459	$	17,840	$	29,299

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Marketable Securities (Tables)

12 Months Ended

Dec. 31, 2013

Investments Debt And Equity Securities [Abstract]

Fair Value of Available for Sale Marketable Securities

At December 31, 2013 and 2012, the fair value of marketable securities, which were all classified as available for sale, included the following (in thousands):

	December 31, 2013
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value
Level 2:
Certificates of deposit	$	2,260	$	—	$	—		$	2,260
Corporate debt securities		46,430		—		(31	)		46,399
Subtotal		48,690		—		(31	)		48,659
Total	$	48,690	$	—	$	(31	)	$	48,659
	December 31, 2012
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value
Level 1:
Mutual funds	$	5,042	$	30	$	—		$	5,072
Level 2:
Certificates of deposit		2,254		—		—			2,254
Commercial paper		3,122		1		—			3,123
Corporate debt securities		27,017		1		(17	)		27,001
U.S. government securities		14,499		3		—			14,502
Subtotal		46,892		5		(17	)		46,880
Total	$	51,934	$	35	$	(17	)	$	51,952

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Income Taxes - Components of the Income Tax Liability (Detail) (USD $)	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Income Tax Disclosure [Abstract]
Unrecognized tax benefits	$ 167,000
Accrued interest and penalties	2,000
Balance at end of year	$ 169,000

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Goodwill - Summary of Changes in Carrying Amount of Goodwill (Detail) (USD $) In Thousands, unless otherwise specified				12 Months Ended				12 Months Ended					12 Months Ended						12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2013 Sy. Med Development, Inc. [Member]	Dec. 31, 2012 Sy. Med Development, Inc. [Member]	Dec. 31, 2013 Baptist Leadership Group [Member]	Sep. 09, 2013 Baptist Leadership Group [Member]	Dec. 31, 2012 Decision Critical, Inc. [Member]	Jun. 29, 2012 Decision Critical, Inc. [Member]	Dec. 31, 2013 Workforce Development [Member]	Dec. 31, 2012 Workforce Development [Member]	Dec. 31, 2011 Workforce Development [Member]	Dec. 31, 2013 Workforce Development [Member] Sy. Med Development, Inc. [Member]	Dec. 31, 2012 Workforce Development [Member] Sy. Med Development, Inc. [Member]	Dec. 31, 2012 Workforce Development [Member] Decision Critical, Inc. [Member]	Dec. 31, 2013 Research/Patient Experience [Member]	Dec. 31, 2012 Research/Patient Experience [Member]	Dec. 31, 2011 Research/Patient Experience [Member]	Dec. 31, 2013 Research/Patient Experience [Member] Baptist Leadership Group [Member]
Goodwill [Line Items]
Goodwill, beginning balance	$ 35,746	$ 29,299	$ 21,147				$ 6,300		$ 2,900	$ 11,592	$ 11,459	$ 3,307				$ 24,154	$ 17,840	$ 17,840
Goodwill acquired				133	5,291	6,314		2,861					133	5,291	2,861				6,314
Goodwill, ending balance	$ 35,746	$ 29,299	$ 21,147	$ 5,400			$ 6,300		$ 2,900	$ 11,592	$ 11,459	$ 3,307				$ 24,154	$ 17,840	$ 17,840

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Intangible Assets (Tables)

12 Months Ended

Dec. 31, 2013

Goodwill And Intangible Assets Disclosure [Abstract]

Identifiable Intangible Assets

Identifiable intangible assets are comprised of the following (in thousands):

	As of December 31, 2013							As of December 31, 2012
	Gross Amount		Accumulated Amortization			Net		Gross Amount		Accumulated Amortization			Net
Customer related	$	16,889	$	(10,145	)	$	6,744	$	15,619	$	(8,969	)	$	6,650
Other		3,370		(1,244	)		2,126		3,222		(1,067	)		2,155
Total	$	20,259	$	(11,389	)	$	8,870	$	18,841	$	(10,036	)	$	8,805

Expected Annual Amortization Expense

The expected future annual amortization expense for the years ending December 31, is as follows (in thousands):

2014	$	1,569
2015		1,211
2016		1,122
2017		1,092
2018		990
Thereafter		2,886
Total	$	8,870

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Business Segments (Tables)

12 Months Ended

Dec. 31, 2013

Segment Reporting [Abstract]

Business Segment Information Based on Net Revenues and Net Income from Operations

The following is the Company’s business segment information as of and for the years ended December 31, 2013, 2012 and 2011 (in thousands).

	Year ended December 31, 2013
	Workforce Development		Research/Patient Experience		Unallocated			Consolidated
Revenues, net	$	103,820	$	28,454	$	—		$	132,274
Cost of revenues (excluding depreciation and amortization)		39,478		16,127		—			55,605
Product development		10,262		1,495		—			11,757
Sales and marketing		18,301		5,415		336			24,052
Other general and administrative		3,787		1,530		13,025			18,342
Depreciation and amortization		3,512		1,068		3,272			7,852
Total income from operations	$	28,480	$	2,819	$	(16,633	)	$	14,666
	Year ended December 31, 2012
	Workforce Development		Research/Patient Experience		Unallocated			Consolidated
Revenues, net	$	78,566	$	25,166	$	—		$	103,732
Cost of revenues (excluding depreciation and amortization)		28,390		13,268		—			41,658
Product development		7,040		1,570		—			8,610
Sales and marketing		14,081		5,420		391			19,892
Other general and administrative		2,760		1,330		9,362			13,452
Depreciation and amortization		2,877		1,179		2,605			6,661
Total income from operations	$	23,418	$	2,399	$	(12,358	)	$	13,459
	Year ended December 31, 2011
	Workforce Development		Research/Patient Experience		Unallocated			Consolidated
Revenues, net	$	58,078	$	23,988	$	—		$	82,066
Cost of revenues (excluding depreciation and amortization)		18,842		12,224		—			31,066
Product development		5,907		1,566		—			7,473
Sales and marketing		10,871		4,733		413			16,017
Other general and administrative		2,116		1,632		7,012			10,760
Depreciation and amortization		2,364		1,194		1,854			5,412
Total income from operations	$	17,978	$	2,639	$	(9,279	)	$	11,338

Business Segment Information Based on Assets

The following is the Company’s business segment information as of and for the years ended December 31, 2013, 2012 and 2011 (in thousands).

	Year ended December 31, 2013
	Workforce Development		Research/Patient Experience		Unallocated		Consolidated
*Segment assets	$	60,013	$	34,727	$	117,854	$	212,594
Purchases of property and equipment	$	2,598	$	171	$	1,675	$	4,444
Payments associated with capitalized software development	$	3,712	$	555	$	—	$	4,267

	Year ended December 31, 2012
	Workforce Development		Research/Patient Experience		Unallocated		Consolidated
*Segment assets	$	46,693	$	23,978	$	103,857	$	174,528
Purchases of property and equipment	$	1,728	$	120	$	2,468	$	4,316
Payments associated with capitalized software development	$	3,536	$	899	$	0	$	4,435

	Year ended December 31, 2011
	Workforce Development		Research/Patient Experience		Unallocated		Consolidated
*Segment assets	$	27,322	$	26,088	$	100,827	$	154,237
Purchases of property and equipment	$	1,577	$	44	$	2,494	$	4,115
Payments associated with capitalized software development	$	5,720	$	345	$	0	$	6,065

* Segment assets include accounts and unbilled receivables, prepaid royalties, prepaid and other current assets, other assets, capitalized software development, certain property and equipment, and intangible assets. Cash and cash equivalents and marketable securities are not allocated to individual segments, and are included within Unallocated. A significant portion of property and equipment assets are included within Unallocated.

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Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2013

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Reporting Entity and Segments

HealthStream, Inc. (the “Company”) was incorporated in 1990 as a Tennessee corporation and is headquartered in Nashville, Tennessee. We operate our business in two segments: HealthStream Workforce Development Solutions and HealthStream Research/Patient Experience Solutions. Our Workforce Development products consist of SaaS-based services and subscription-based solutions to meet the ongoing training, certification, assessment and development needs of the healthcare community. These solutions provide, deliver and track computer based education for our customers in the United States through our software-as-a-service (SaaS) model. HealthStream Research/Patient Experience products offer healthcare organizations a wide range of quality and satisfaction surveys, consulting services, analyses of survey results, and other research-based services.

Recognition of Revenue

Revenues are derived from providing services through our SaaS-based workforce development platform products, courseware subscriptions, provision of survey and research services, professional services, content maintenance, custom courseware development and other education and training services.

The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when persuasive evidence of an arrangement exists, prices are fixed or determinable, services and products are provided to the customer and collectability is probable or reasonably assured.

Revenue recognized from software and other arrangements is allocated to each element of the arrangement based on the relative fair values of the elements. While elements include software products and post contract customer support, the fair value of each element is based on objective evidence specific to the vendor. If fair value cannot be determined for each element of the arrangement, all revenue from the arrangement is deferred until fair value can be determined or until all elements of the arrangement are delivered and customer acceptance has occurred. Sales of the Company’s SaaS-based workforce development platform products include customer support, implementation services, and training; therefore all revenues are deferred until the SaaS-based product is implemented, at which time revenues are recognized ratably over the subscription service period. In the event that circumstances occur, which give rise to uncertainty regarding the collectibility of contracted amounts, revenue recognition is suspended until such uncertainty is resolved. Fees for these services are billed on either a monthly, quarterly, or annual basis.

Revenues derived from the delivery of services through the Company’s SaaS-based workforce development platform products and courseware subscriptions are recognized ratably over the term of the subscription service agreement or over the historical usage period, if usage typically differs from the subscription period. Other training revenues are generally recognized upon the completion of training.

Revenues derived from the license of installed software products, associated with the Sy.Med products, are recognized upon shipment or installation of the software. Software support and maintenance revenues are recognized ratably over the term of the related agreement.

Revenues recognized from the Company’s survey and research services are determined using both the proportional performance method and the completed contract method. Revenues are generally earned over the estimated survey cycle, which typically ranges from less than one month to up to five months. The survey cycle is generally initiated based on the receipt of the first survey response and runs through provision of related survey reports to the customer. If survey results are not available to the customer during the survey fielding cycle, revenues are recognized at time of report delivery. Revenues for coaching and consulting engagements are recognized using the proportional performance method over the term of the underlying contract. Fees for survey services are billed upon initiation of the survey cycle, with progress billings made throughout the survey cycle. Fees for coaching and consulting engagements are billed upon initiation of the engagement with progress billings throughout the term of the contract.

Revenues from professional services, content maintenance, and custom courseware development services are recognized using a percentage of completion method based on labor hours, which correspond to the completion of performance milestones and deliverables. All other revenues are recognized as the related services are performed or products are delivered. Fees for these services are generally billed at project initiation and upon completion of various milestones.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All inter-company accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates and such differences could be material to the consolidated financial statements.

Cash Equivalents

The Company considers cash equivalents to be unrestricted, highly liquid investments with initial maturities of less than three months.

Marketable Securities

Marketable securities are classified as available for sale and are stated at fair market value, with the unrealized gains and losses, net of tax, reported in other comprehensive income (loss) on the accompanying consolidated balance sheets. Realized gains and losses and declines in market value judged to be other than temporary on investments in marketable securities are included in interest and other income on the accompanying consolidated statements of income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available for sale are included in other income (expense) on the accompanying consolidated statements of income. Premiums and discounts are amortized over the life of the related available for sale security as an adjustment to yield using the effective interest method.

Accounts Receivable-Unbilled

Accounts receivable-unbilled represents the following: 1) revenue earned and recognized on contracts accounted for using the proportional performance method for which invoices have not been generated or contractual billing dates have not been reached; and 2) the difference between billings for contracts containing escalated pricing over the term of the agreement and the recognition of revenue ratably over the subscription period.

Deferred Revenue

Deferred revenue represents amounts, which have been billed or collected in advance of revenue recognition, and is recognized as the revenue recognition criteria are met. The Company typically invoices customers in quarterly, bi-annual, or annual installments.

Prepaid Royalties

Prepaid royalties represents advance payments associated with the sale of third party products, such as courseware subscriptions. Royalties are typically paid in advance at the commencement of the revenue cycle, or periodically throughout the revenue cycle, such as quarterly, bi-annual, or annual installments. Royalty payments are amortized over the term of the underlying contracts, which generally range from 12 to 36 months, in order to match the direct royalty costs to the same period the subscription revenue is recognized. Amortization of royalties is included under the caption “cost of revenues (excluding depreciation and amortization)” in the accompanying consolidated statements of income.

Allowance for Doubtful Accounts

The Company estimates its allowance for doubtful accounts using a specific identification method. Management determines the allowance for doubtful accounts on a case-by-case basis, based on the facts and circumstances surrounding each potentially uncollectible receivable. An allowance is also maintained for accounts that are not specifically identified that may become uncollectible in the future. Uncollectible receivables are written-off in the period management believes it has exhausted every opportunity to collect payment from the customer. Bad debt expense is recorded when events or circumstances indicate an additional allowance is required based on the Company’s specific identification approach.

Changes in the allowance for doubtful accounts and the amounts charged to bad debt expense for the years ended December 31, were as follows (in thousands):

	Allowance Balance at Beginning of Period		Charged to Costs and Expenses		Write-offs			Allowance Balance at End of Period
2013	$	142	$	115	$	(46	)	$	211
2012	$	149	$	120	$	(127	)	$	142
2011	$	157	$	50	$	(58	)	$	149

Capitalized Software Development

Capitalized software development is stated on the basis of cost, and is presented net of accumulated amortization. The Company capitalizes costs incurred during the software development phase for projects when such costs are material. These assets are amortized using the straight-line method, generally ranging between one to five years. The Company capitalized approximately $4.3 million and $4.4 million during 2013 and 2012, respectively. Maintenance and operating costs are expensed as incurred. As of December 31, 2013 and 2012, there were no capitalized internal development costs for computer software developed for resale.

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. The fair value hierarchy prioritizes the inputs to valuation techniques used in measuring fair value. There are three levels to the fair value hierarchy based on the reliability of inputs, as follows:

Level 1	–	Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2	–	Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3	–	Unobservable inputs in which little or no market data exists, therefore requiring the Company to develop its own assumptions.

The Company evaluates assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them for each reporting period. This determination requires significant judgments to be made by the Company.

At December 31, 2013, the fair value measurement amounts for assets consisted of marketable securities which are classified as available for sale. The carrying amounts reported in the consolidated balance sheets approximate the fair value of the Company’s marketable securities based on quoted market prices or alternative pricing sources and models utilizing market observable inputs. At December 31, 2013 and 2012, the Company did not have any financial liabilities that were subject to fair value measurements.

Property and Equipment

Property and equipment are stated on the basis of cost. Depreciation and amortization are provided on the straight-line method over the following estimated useful lives, except for assets under capital leases and leasehold improvements, which are amortized over the shorter of the estimated useful life or their respective lease term. Depreciation and amortization of property and equipment totaled $3.3 million and $2.6 million for the years ended December 31, 2013 and 2012, respectively.

	Years
Furniture and fixtures		5-10
Equipment		3-5

Goodwill and Intangible Assets

Goodwill represents the excess of purchase price over fair value of net tangible assets acquired. The Company evaluates goodwill for impairment at the reporting unit level by assessing whether it is more likely than not that the fair value of a reporting unit exceeds its carrying value. If this assessment concludes that is more likely than not that the fair value of a reporting unit exceeds its carrying value, then goodwill is not considered impaired and no further impairment testing is required. Conversely, if the assessment concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, a goodwill impairment test is performed to compare the fair value of the reporting unit to its carrying value. The Company determines fair value of the reporting units using both income and market based models. The Company will perform its goodwill impairment test whenever events or changes in facts or circumstances indicate that impairment may exist, and at least annually during the fourth quarter.

As of December 31, 2013 intangible assets with remaining unamortized balances include contract rights and customer relationships, internally-developed technology and patents, non-competition agreements, and trade names. These intangible assets are considered to have definite useful lives and are being amortized on a straight line basis over periods typically ranging between five and ten years. The weighted average amortization period for definite lived intangible assets as of December 31, 2013 was 8.7 years. Intangible assets are reviewed for impairment whenever events or changes in facts or circumstances indicate that the carrying amount of the assets may not be recoverable. There were no impairments identified or recorded for the years ended December 31, 2013, 2012, or 2011.

Long-Lived Assets

Long-lived assets to be held for use are reviewed for events or changes in facts and circumstances, both internally and externally, which may indicate that an impairment of long-lived assets held for use is present. The Company measures any impairment using observable market values or discounted future cash flows from the related long-lived assets. The cash flow estimates and discount rates incorporate management’s best estimates, using appropriate and customary assumptions and projections at the date of evaluation. Management periodically evaluates whether the carrying value of long-lived assets, including property and equipment, capitalized software development, other assets and intangible assets will be recoverable. There were no impairments identified or recorded for the years ended December 31, 2013, 2012, or 2011.

Other Assets

Other assets are comprised of the long-term portion of content development fees and non-marketable equity investments.

Non-Marketable Equity Investments

Non-marketable equity investments are accounted for using the equity method when the Company can exercise significant influence over the investee. Investments for which the Company is not able to exercise significant influence over the investee are accounted for under the cost method. The proportionate share of income or loss from equity method investments are recorded under the caption “other income (expense), net” in the accompanying consolidated statements of income.

Financial Instruments

The Company has financial instruments, including cash and cash equivalents, accounts receivable, accounts receivable-unbilled, accounts payable, accrued liabilities, and deferred revenue. The carrying amounts of these financial instruments approximate fair value because of the short term maturity or short term nature of such instruments. Marketable securities approximate fair value based on quoted market prices, see Note 4.

Income Taxes

Income taxes are accounted for using the asset and liability method, whereby deferred tax assets and liabilities are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities measured at tax rates that will be in effect for the year in which the differences are expected to affect taxable income. Management evaluates all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed. Future realization of the tax benefit of an existing deductible temporary difference or carryforward ultimately depends on the existence of sufficient taxable income of the appropriate character within the carryback or carryforward period available under the tax law. There are four possible sources of taxable income that may be available under the tax law to realize a tax benefit for deductible temporary differences and carryforwards: 1) future reversals of existing taxable temporary differences, 2) future taxable income exclusive of reversing temporary differences and carryforwards, 3) taxable income in prior carryback year(s) if carryback is permitted under the tax law, and 4) tax-planning strategies that would, if necessary, be implemented to realize deductible temporary differences or carryforwards prior to their expiration. Management reviews the realizability of its deferred tax assets each reporting period to identify whether any significant changes in circumstances or assumptions have occurred that could materially affect the realizability of deferred tax assets. As of December 31, 2013, the Company had established a valuation allowance of $1.3 million for the portion of its net deferred tax assets that are not more likely than not expected to be realized.

The Company accounts for income tax uncertainties using a more-likely-than-not recognition threshold based on the technical merits of the tax position taken. Tax positions that meet the more-likely-than-not recognition threshold are measured in order to determine the tax benefit to be recognized in the financial statements. The Company expenses any penalties or interest associated with tax obligations as general and administrative expenses and interest expense, respectively.

Other Long Term Liabilities

Other long term liabilities represent the deferred rent liability associated with an operating lease for office space in Nashville, Tennessee as well as deferred service credits (see Note 9).

Advertising

The Company expenses the costs of advertising as incurred. Advertising expense for the years ended December 31, 2013, 2012, and 2011 was approximately $408,000, $349,000, and $251,000, respectively.

Shipping and Handling Costs

Shipping and handling costs that are associated with our products and services are included in cost of revenues.

Earnings Per Share

Basic earnings per share is computed by dividing the net income available to common shareholders for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing the net income for the period by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares, composed of incremental common shares issuable upon the exercise of stock options, are included in diluted net income per share to the extent these shares are dilutive. Common equivalent shares that have an anti-dilutive effect on diluted net income per share have been excluded from the calculation of diluted weighted average shares outstanding for the years ended December 31, 2013, 2012, and 2011.

Concentrations of Credit Risk and Significant Customers

The Company places its temporary excess cash investments in high quality, short-term money market instruments. At times, such investments may be in excess of the FDIC insurance limits.

The Company sells its products and services to various companies in the healthcare industry that are located in the United States. We perform ongoing credit evaluations of our customers’ financial condition and generally require no collateral from customers. The Company did not have any single customer representing over 10% of net revenues during 2013, 2012, or 2011.

Stock Based Compensation

As of December 31, 2013, the Company maintains two stock based compensation plans, which are described in Note 12. The Company accounts for stock based compensation using the fair-value based method for costs related to share-based payments, including stock options and restricted share units. The Company uses the Black Scholes option pricing model for calculating the fair value of option awards issued under its stock based compensation plan. The Company measures compensation cost of restricted share units based on the closing fair market value of the Company’s stock on the date of grant. Stock based compensation cost is measured at the grant date, based on the fair value of the award that is ultimately expected to vest, and is recognized as an expense over the requisite service period. The Company recognizes tax benefits from stock based compensation if an excess tax benefit is realized. Excess tax benefits are recorded as an increase to common stock when realized.

Newly Issued Accounting Standards

In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-02), which is effective prospectively for public companies for reporting periods beginning after December 15, 2012. This new accounting standard improves the reporting of reclassifications out of accumulated other comprehensive income (AOCI) by requiring an entity to report the effect of significant reclassifications out of AOCI on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. We adopted this new guidance on January 1, 2013 and the adoption did not have a material effect on our consolidated financial statements.

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Income Taxes (Tables)

12 Months Ended

Dec. 31, 2013

Income Tax Disclosure [Abstract]

Summary of Provision for Income Taxes

The provision for income taxes is comprised of the following (in thousands):

	Year Ended December 31,
	2013		2012		2011
Current federal	$	2,474	$	58	$	163
Current state		1,444		273		214
Deferred federal		2,315		4,804		3,723
Deferred state		191		797		304
Provision for income taxes	$	6,424	$	5,932	$	4,404

Reconciliation of Income Taxes at the Statutory Federal Income Tax Rate to the Provision for Income Taxes

A reconciliation of income taxes at the statutory federal income tax rate to the provision for income taxes included in the accompanying consolidated statements of income is as follows (in thousands):

	Year Ended December 31,
	2013		2012		2011
Federal tax provision at the statutory rate	$	5,194	$	4,751	$	3,972
State income tax provision, net of federal benefit		898		974		337
Change in state valuation allowance		231		—		—
Other		101		207		95
Provision for income taxes	$	6,424	$	5,932	$	4,404

Reconciliation of the Beginning and Ending liability for Gross Unrecognized Tax Benefits

A reconciliation of the beginning and ending liability for gross unrecognized tax benefits at December 31, 2013 and 2012, are as follows (in thousands):

	December 31,
	2013		2012
Balance at beginning of year	$	—	$	—
Additions for tax positions in the current year		167		—
Balance at end of year	$	167	$	—

Components of the Income Tax Liability

The components of the income tax liability at December 31, 2013 and 2012, are as follows (in thousands):

	December 31,
	2013		2012
Unrecognized tax benefits	$	167	$	—
Accrued interest and penalties		2		—
Balance at end of year	$	169	$	—

Significant Components of Deferred Tax Assets and Deferred Tax Liabilities

Significant components of deferred tax assets and deferred tax liabilities are as follows (in thousands):

	December 31,
	2013			2012
Deferred tax assets:
Allowance for doubtful accounts	$	84		$	57
Accrued liabilities		1,225			463
Tax credits		702			902
Stock based compensation		966			650
Net operating loss carryforwards		1,256			3,485
Total deferred tax assets		4,233			5,557
Less: Valuation allowance		(1,325	)		(1,093	)
Deferred tax assets, net of valuation allowance		2,908			4,464
Deferred tax liabilities:
Deductible goodwill		2,020			1,492
Nondeductible intangible assets		2,677			3,194
Prepaid assets		781			538
Capitalized software development		2,910			2,253
Deferred revenue		—			220
Depreciation		341			223
Basis difference on investments		533			559
Total deferred tax liabilities		9,262			8,479
Net deferred tax liabilities	$	(6,354	)	$	(4,015	)

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Earnings Per Share - Additional Information (Detail)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Earnings Per Share [Abstract]
Total number of common equivalent shares excluded from the calculations of diluted earnings per share	70,000	105,000	247,000

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Income Taxes - Reconciliation of Income Taxes at the Statutory Federal Income Tax Rate to the Provision for Income Taxes (Detail) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Income Tax Disclosure [Abstract]
Federal tax provision at the statutory rate	$ 5,194	$ 4,751	$ 3,972
State income tax provision, net of federal benefit	898	974	337
Change in state valuation allowance	231
Other	101	207	95
Provision for income taxes	$ 6,424	$ 5,932	$ 4,404

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Current assets:
Cash and cash equivalents	$ 59,537	$ 41,365
Marketable securities	48,659	51,952
Accounts receivable, net of allowance for doubtful accounts of $211 and $142 at December 31, 2013 and 2012, respectively	25,314	15,348
Accounts receivable - unbilled	1,392	1,163
Deferred tax assets, current		2,459
Prepaid royalties, net of amortization	8,857	3,738
Other prepaid expenses and other current assets	3,365	2,266
Total current assets	147,124	118,291
Property and equipment:
Equipment	21,631	18,108
Leasehold improvements	5,521	5,050
Furniture and fixtures	3,854	3,368
Property and equipment, gross	31,006	26,526
Less accumulated depreciation and amortization	(21,968)	(18,706)
Total, property and equipment	9,038	7,820
Capitalized software development, net of accumulated amortization of $13,910 and $10,987 at December 31, 2013 and 2012, respectively	11,077	9,732
Goodwill	35,746	29,299
Intangible assets, net of accumulated amortization of $11,389 and $10,036 at December 31, 2013 and 2012, respectively	8,870	8,805
Other assets	739	581
Total assets	212,594	174,528
Current liabilities:
Accounts payable	2,311	1,057
Accrued royalties	8,435	5,037
Accrued liabilities	5,503	4,671
Accrued compensation and related expenses	1,614	1,121
Deferred tax liabilities, current	181
Deferred revenue	38,168	23,146
Total current liabilities	56,212	35,032
Deferred tax liabilities, noncurrent	6,173	6,474
Other long term liabilities	776	826
Commitments and contingencies
Shareholders' equity:
Common stock, no par value, 75,000 shares authorized; 27,327 and 26,233 shares issued and outstanding at December 31, 2013 and 2012, respectively	166,888	158,020
Accumulated deficit	(17,424)	(25,842)
Accumulated other comprehensive income (loss)	(31)	18
Total shareholders' equity	149,433	132,196
Total liabilities and shareholders' equity	$ 212,594	$ 174,528

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Intangible Assets - Additional Information (Detail) (USD $) In Millions, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Finite-Lived Intangible Assets [Line Items]
Estimated useful life of intangible assets	8 years 8 months 12 days
Amortization of intangible assets	$ 1.5	$ 1.1	$ 0.9
Minimum [Member]
Finite-Lived Intangible Assets [Line Items]
Estimated useful life of intangible assets	5 years
Minimum [Member] | Customer Related [Member]
Finite-Lived Intangible Assets [Line Items]
Estimated useful life of intangible assets	8 years
Minimum [Member] | Other [Member]
Finite-Lived Intangible Assets [Line Items]
Estimated useful life of intangible assets	5 years
Maximum [Member]
Finite-Lived Intangible Assets [Line Items]
Estimated useful life of intangible assets	10 years
Maximum [Member] | Customer Related [Member]
Finite-Lived Intangible Assets [Line Items]
Estimated useful life of intangible assets	10 years
Maximum [Member] | Other [Member]
Finite-Lived Intangible Assets [Line Items]
Estimated useful life of intangible assets	9 years

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Consolidated Statements of Shareholders' Equity (USD $) In Thousands, except Share data	Total	Common Stock [Member]	Accumulated Deficit [Member]	Accumulated Other Comprehensive Income (Loss) [Member]
Beginning balance at Dec. 31, 2010	$ 56,791	$ 97,227	$ (40,431)	$ (5)
Beginning balance, shares at Dec. 31, 2010		21,805,000
Net income	6,944		6,944
Comprehensive income (loss)	(2)			(2)
Stock based compensation	788	788
Tax benefits from equity awards	21	21
Common stock issued under stock plans, net of shares withheld for employee taxes	1,242	1,242
Common stock issued under stock plans, net of shares withheld for employee taxes, shares		503,000
Issuance of common stock	55,131	55,131
Issuance of common stock, shares		3,588,000
Ending balance at Dec. 31, 2011	120,915	154,409	(33,487)	(7)
Ending balance, shares at Dec. 31, 2011		25,896,000
Net income	7,645		7,645
Comprehensive income (loss)	25			25
Issuance of common stock in acquisition	1,541	1,541
Issuance of common stock in acquisition, shares		56,000
Stock based compensation	1,136	1,136
Tax benefits from equity awards	111	111
Common stock issued under stock plans, net of shares withheld for employee taxes	823	823
Common stock issued under stock plans, net of shares withheld for employee taxes, shares		281,000
Ending balance at Dec. 31, 2012	132,196	158,020	(25,842)	18
Ending balance, shares at Dec. 31, 2012		26,233,000
Net income	8,418		8,418
Comprehensive income (loss)	(49)			(49)
Issuance of common stock in acquisition	534	534
Issuance of common stock in acquisition, shares		15,000
Stock based compensation	1,458	1,458
Tax benefits from equity awards	3,722	3,722
Common stock issued under stock plans, net of shares withheld for employee taxes	3,154	3,154
Common stock issued under stock plans, net of shares withheld for employee taxes, shares		1,079,000
Ending balance at Dec. 31, 2013	$ 149,433	$ 166,888	$ (17,424)	$ (31)
Ending balance, shares at Dec. 31, 2013		27,327,000

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Stock Based Compensation - Summary of Activity and Various Other Information Relative to Stock Options (Detail) (USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2013
Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]
Outstanding at beginning of period, Common Shares	1,914
Granted, Common Shares
Exercised, Common Shares	(1,073)
Expired, Common Shares
Forfeited, Common Shares	(4)
Outstanding at end of period, Common Shares	837
Exercisable at end of period, Common Shares	594
Outstanding at beginning of period, Weighted-Average Exercise Price	$ 4.29
Granted, Weighted-Average Exercise Price
Exercised, Weighted-Average Exercise Price	$ 3.15
Expired, Weighted-Average Exercise Price
Forfeited, Weighted-Average Exercise Price	$ 6.11
Outstanding at end of period, Weighted-Average Exercise Price	$ 5.73
Exercisable at end of period, Weighted-Average Exercise Price	$ 5.06
Outstanding at end of period, Aggregate Intrinsic Value	$ 22,514
Exercisable at end of period, Aggregate Intrinsic Value	$ 16,375

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Summary of Significant Accounting Policies - Additional Information (Detail) (USD $)	0 Months Ended	12 Months Ended
	Dec. 31, 2013 Plans	Dec. 31, 2013 SourcesofTaxableIncome Segment	Dec. 31, 2012	Dec. 31, 2011
Business And Basis Of Presentation [Line Items]
Number of operating segments		2
Maturity of unrestricted cash equivalent		3 months
Capitalized software development amount		$ 4,300,000	$ 4,400,000
Capitalized internal development costs for computer software developed for resale		0	0
Depreciation and amortization of property and equipment		3,300,000	2,600,000
Finite lived intangible assets amortization period		8 years 8 months 12 days
Impairments identified or recorded		0	0	0
Impairments identified or recorded for long-lived assets		0	0	0
Number of sources of taxable income		4
Valuation allowance	1,325,000	1,325,000	1,093,000
Advertising expense		$ 408,000	$ 349,000	$ 251,000
Number of stock based compensation plans	2
Sales [Member]
Business And Basis Of Presentation [Line Items]
Customer representing over 10% of net revenues		10.00%	10.00%	10.00%
Number of customer single customer representing over 10% of net revenues		0	0	0
Minimum [Member]
Business And Basis Of Presentation [Line Items]
Revenues earned over the estimated survey cycle, period		1 month
Royalty payments amortization period		12 months
Assets amortized cost		1 year
Finite lived intangible assets amortization period		5 years
Maximum [Member]
Business And Basis Of Presentation [Line Items]
Revenues earned over the estimated survey cycle, period		5 months
Royalty payments amortization period		36 months
Assets amortized cost		5 years
Finite lived intangible assets amortization period		10 years

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Debt - Additional Information (Detail) (USD $)			12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2013 Revolving Credit Facility [Member]	Dec. 31, 2013 Revolving Credit Facility [Member] Variable Interest Rate One [Member]	Dec. 31, 2013 Revolving Credit Facility [Member] Variable Interest Rate Two [Member]	Dec. 31, 2013 Revolving Credit Facility [Member] Maximum [Member]	Dec. 31, 2013 Revolving Credit Facility [Member] Minimum [Member]
Line of Credit Facility [Line Items]
Debt outstanding	$ 0	$ 0
Aggregate principal amount of loan agreement			20,000,000
Maturity date of Loan agreement			Jul. 21, 2014
Interest on borrowings			30-Day LIBOR Rate plus a margin of either 175 or 200 basis points
Period of LIBOR Rate			30 days
Variable rate one				1.75%	2.00%
Commitment fee paid per annum			0.25%
Maximum total leverage ratio						2.0	1.0
Funded debt to total capitalization						40.00%
Tangible net worth							1.00
Balances outstanding on the revolving credit facility			$ 0

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Leases

12 Months Ended

Dec. 31, 2013

Leases [Abstract]

Leases

15. LEASES

The Company has non-cancellable operating leases primarily for office space and office equipment. Some lease agreements contain provisions for escalating rent payments over the initial terms of the lease. The Company accounts for these leases by recognizing rent expense on a straight-line basis and adjusting the deferred rent expense liability for the difference between the straight-line rent expense and the amount of rent paid. The Company also leases certain office equipment under operating leases. Total rent expense under all operating leases was approximately $2.4 million, $2.2 million, and $1.9 million, for the years ended December 31, 2013, 2012, and 2011, respectively.

Future rental payment commitments at December 31, 2013 under non-cancelable operating leases, with initial terms of one year or more, are as follows (in thousands):

2014	$	2,665
2015		2,062
2016		1,359
2017		446
2018		59
Thereafter		—
Total minimum lease payments	$	6,591

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Summary of Significant Accounting Policies - Changes in the Allowance for Doubtful Accounts and the Amounts Charged to Bad Debt Expense (Detail) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Accounting Policies [Abstract]
Allowance Balance at Beginning of Period	$ 142	$ 149	$ 157
Charged to Costs and Expenses	115	120	50
Write-offs	(46)	(127)	(58)
Allowance Balance at End of Period	$ 211	$ 142	$ 149

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Subsequent Event

12 Months Ended

Dec. 31, 2013

Subsequent Events [Abstract]

Subsequent Event

17. SUBSEQUENT EVENT

On March 3, 2014, the Company acquired all of the stock of Health Care Compliance Strategies, Inc. (HCCS) a Jericho, New York based company that specializes in healthcare compliance solution and services. The Company acquired HCCS to further advance its suite of workforce development solutions, including its offering of compliance solutions. The consideration paid for HCCS consisted of approximately $13.0 million in cash, subject to a post-closing working capital adjustment, and 81,614 shares of our common stock. The Company may make additional payments of up to $750,000, contingent upon achievement of certain performance milestones post-closing.

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Subsequent Events - Additional Information (Detail) (Subsequent Event [Member], Health Care Compliance Strategies Inc. [Member], USD $)	0 Months Ended
	Mar. 03, 2014
Subsequent Event [Member] | Health Care Compliance Strategies Inc. [Member]
Subsequent Event [Line Items]
Cash consideration paid for business acquisition	$ 13,000,000
Consideration paid, Shares	81,614
Additional Payment of Consideration	$ 750,000
Period to achieve certain financial targets and business outcomes	12 months

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
OPERATING ACTIVITIES:
Net income	$ 8,418	$ 7,645	$ 6,944
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	7,852	6,661	5,412
Deferred income taxes	2,506	5,601	4,027
Stock based compensation expense	1,458	1,136	788
Excess tax benefits from equity awards	(3,722)	(111)	(21)
Provision for doubtful accounts	115	120	50
Loss on non-marketable equity investments	37	16
Other	1,660	722	83
Changes in assets and liabilities, net of acquisitions:
Accounts and unbilled receivables	(10,056)	1,227	(4,997)
Prepaid royalties	(5,119)	(329)	(263)
Other prepaid expenses and other current assets	(1,207)	(537)	(283)
Other assets	105	(15)	212
Accounts payable	1,254	(1,529)	211
Accrued royalties	3,399	1,579	1,450
Accrued liabilities, accrued compensation and related expenses, and other long-term liabilities	4,822	542	124
Deferred revenue	14,761	(198)	6,018
Net cash provided by operating activities	26,283	22,530	19,755
INVESTING ACTIVITIES:
Acquisitions, net of cash acquired	(7,560)	(9,901)
Proceeds from sales of marketable securities	5,062		2,221
Proceeds from maturities of marketable securities	82,661	78,075	8,135
Purchases of marketable securities	(86,139)	(118,176)	(17,284)
Investments in non-marketable equity investments	(300)	(250)
Payments associated with capitalized software development	(4,267)	(4,435)	(6,065)
Purchases of property and equipment	(4,444)	(4,316)	(4,115)
Net cash used in investing activities	(14,987)	(59,003)	(17,108)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock			55,131
Proceeds from exercise of stock options	3,318	823	1,242
Taxes paid related to net settlement of equity awards	(164)
Excess tax benefits from equity awards	3,722	111	21
Payments on capital lease obligations			(5)
Net cash provided by financing activities	6,876	934	56,389
Net increase (decrease) in cash and cash equivalents	18,172	(35,539)	59,036
Cash and cash equivalents at beginning of year	41,365	76,904	17,868
Cash and cash equivalents at end of year	59,537	41,365	76,904
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	51	61	35
Income taxes paid	371	427	387
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock in connection with acquisitions	534	1,541
Acquisition of content rights in exchange for future services		$ 500

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Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Statement Of Financial Position [Abstract]
Allowance for doubtful accounts, net	$ 211	$ 142
Accumulated amortization on capitalized software development	13,910	10,987
Accumulated amortization on intangible assets	$ 11,389	$ 10,036
Common stock, no par value
Common stock, shares authorized	75,000	75,000
Common stock, shares issued	27,327	26,233
Common stock, shares outstanding	27,327	26,233

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Business Segments

12 Months Ended

Dec. 31, 2013

Segment Reporting [Abstract]

Business Segments

10. BUSINESS SEGMENTS

The Company provides services to healthcare organizations and other members within the healthcare industry. These services are primarily focused on the delivery of workforce development products and services (HealthStream Workforce Development Solutions, formerly referred to as HealthStream Learning & Talent Management), as well as survey and research services (HealthStream Research/Patient Experience Solutions).

The Company measures segment performance based on operating income before income taxes and prior to the allocation of certain corporate overhead expenses, interest income, interest expense, and depreciation. The Unallocated component below includes corporate functions, such as accounting, human resources, legal, investor relations, administrative, and executive personnel, depreciation, a portion of amortization, and certain other expenses, which are not currently allocated in measuring segment performance. The following is the Company’s business segment information as of and for the years ended December 31, 2013, 2012 and 2011 (in thousands).

	Year ended December 31, 2013
	Workforce Development		Research/Patient Experience		Unallocated			Consolidated
Revenues, net	$	103,820	$	28,454	$	—		$	132,274
Cost of revenues (excluding depreciation and amortization)		39,478		16,127		—			55,605
Product development		10,262		1,495		—			11,757
Sales and marketing		18,301		5,415		336			24,052
Other general and administrative		3,787		1,530		13,025			18,342
Depreciation and amortization		3,512		1,068		3,272			7,852
Total income from operations	$	28,480	$	2,819	$	(16,633	)	$	14,666
*Segment assets	$	60,013	$	34,727	$	117,854		$	212,594
Purchases of property and equipment	$	2,598	$	171	$	1,675		$	4,444
Payments associated with capitalized software development	$	3,712	$	555	$	—		$	4,267

	Year ended December 31, 2012
	Workforce Development		Research/Patient Experience		Unallocated			Consolidated
Revenues, net	$	78,566	$	25,166	$	—		$	103,732
Cost of revenues (excluding depreciation and amortization)		28,390		13,268		—			41,658
Product development		7,040		1,570		—			8,610
Sales and marketing		14,081		5,420		391			19,892
Other general and administrative		2,760		1,330		9,362			13,452
Depreciation and amortization		2,877		1,179		2,605			6,661
Total income from operations	$	23,418	$	2,399	$	(12,358	)	$	13,459
*Segment assets	$	46,693	$	23,978	$	103,857		$	174,528
Purchases of property and equipment	$	1,728	$	120	$	2,468		$	4,316
Payments associated with capitalized software development	$	3,536	$	899	$	—		$	4,435
	Year ended December 31, 2011
	Workforce Development		Research/Patient Experience		Unallocated			Consolidated
Revenues, net	$	58,078	$	23,988	$	—		$	82,066
Cost of revenues (excluding depreciation and amortization)		18,842		12,224		—			31,066
Product development		5,907		1,566		—			7,473
Sales and marketing		10,871		4,733		413			16,017
Other general and administrative		2,116		1,632		7,012			10,760
Depreciation and amortization		2,364		1,194		1,854			5,412
Total income from operations	$	17,978	$	2,639	$	(9,279	)	$	11,338
*Segment assets	$	27,322	$	26,088	$	100,827		$	154,237
Purchases of property and equipment	$	1,577	$	44	$	2,494		$	4,115
Payments associated with capitalized software development	$	5,720	$	345	$	—		$	6,065

* Segment assets include accounts and unbilled receivables, prepaid royalties, prepaid and other current assets, other assets, capitalized software development, certain property and equipment, and intangible assets. Cash and cash equivalents and marketable securities are not allocated to individual segments, and are included within Unallocated. A significant portion of property and equipment assets are included within Unallocated.

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Document and Entity Information (USD $) In Millions, except Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Feb. 28, 2014	Jun. 28, 2013
Document And Entity Information [Abstract]
Document Type	10-K
Amendment Flag	false
Document Period End Date	Dec. 31, 2013
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	FY
Entity Registrant Name	HEALTHSTREAM INC
Entity Central Index Key	0001095565
Current Fiscal Year End Date	--12-31
Entity Well-known Seasoned Issuer	Yes
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		27,420,090
Entity Public Float			$ 514.3

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Income Taxes

12 Months Ended

Dec. 31, 2013

Income Tax Disclosure [Abstract]

Income Taxes

11. INCOME TAXES

The provision for income taxes is comprised of the following (in thousands):

	Year Ended December 31,
	2013		2012		2011
Current federal	$	2,474	$	58	$	163
Current state		1,444		273		214
Deferred federal		2,315		4,804		3,723
Deferred state		191		797		304
Provision for income taxes	$	6,424	$	5,932	$	4,404

A reconciliation of income taxes at the statutory federal income tax rate to the provision for income taxes included in the accompanying consolidated statements of income is as follows (in thousands):

	Year Ended December 31,
	2013		2012		2011
Federal tax provision at the statutory rate	$	5,194	$	4,751	$	3,972
State income tax provision, net of federal benefit		898		974		337
Change in state valuation allowance		231		—		—
Other		101		207		95
Provision for income taxes	$	6,424	$	5,932	$	4,404

Management periodically assesses the realizability of its deferred tax assets, and to the extent that a recovery is not likely, a valuation allowance is established to reduce the deferred tax asset to the amount estimated to be recoverable. At December 31, 2013, a valuation allowance of $1.3 million exists, of which $1.1 million is comprised of the portion of net operating loss carryforwards attributable to the exercises of stock options. Any future reductions of the valuation allowance associated with the portion of the deferred tax asset comprised of stock option exercises would be recognized as an increase to common stock.

As of December 31, 2013, the Company had federal and state net operating loss carryforwards of $18.3 million and $13.9 million, respectively. These loss carryforwards will expire in years 2014 through 2024. As of December 31, 2013, $1.1 million of the net operating loss carryforwards deferred tax asset is attributable to the exercise of stock options, and if realized, the tax benefit will be recorded as an increase to common stock.

The Company has research and development tax credit carryforwards of $393,000 that expire in varying amounts through 2033. These credits were recognized in 2013 as a reduction to common stock. As of December 31, 2013, the Company had alternative minimum tax credit carryforwards of $592,000 that are available to offset future regular tax liabilities and they do not expire. Federal income tax payments of $28,000, $189,000 and $194,000, were made during the years ended December 31, 2013, 2012, and 2011, respectively. State income tax payments of $343,000, $238,000, and $193,000 were made during the years ended December 31, 2013, 2012, and 2011, respectively.

A reconciliation of the beginning and ending liability for gross unrecognized tax benefits at December 31, 2013 and 2012, are as follows (in thousands):

	December 31,
	2013		2012
Balance at beginning of year	$	—	$	—
Additions for tax positions in the current year		167		—
Balance at end of year	$	167	$	—

The components of the income tax liability at December 31, 2013 and 2012, are as follows (in thousands):

	December 31,
	2013		2012
Unrecognized tax benefits	$	167	$	—
Accrued interest and penalties		2		—
Balance at end of year	$	169	$	—

None of the $167,000 of unrecognized tax benefits at December 31, 2013, if recognized, would affect the Company’s effective tax rate.

The Company is subject to income taxation at the federal and various state levels. The Company is subject to U.S. federal tax examinations for tax years 2009 through 2013. Loss carryforwards and credit carryforwards generated or utilized in years earlier than 2009 are also subject to examination and adjustment. The Company has no income tax examinations in process.

Deferred federal and state income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and deferred tax liabilities are as follows (in thousands):

	December 31,
	2013			2012
Deferred tax assets:
Allowance for doubtful accounts	$	84		$	57
Accrued liabilities		1,225			463
Tax credits		702			902
Stock based compensation		966			650
Net operating loss carryforwards		1,256			3,485
Total deferred tax assets		4,233			5,557
Less: Valuation allowance		(1,325	)		(1,093	)
Deferred tax assets, net of valuation allowance		2,908			4,464
Deferred tax liabilities:
Deductible goodwill		2,020			1,492
Nondeductible intangible assets		2,677			3,194
Prepaid assets		781			538
Capitalized software development		2,910			2,253
Deferred revenue		—			220
Depreciation		341			223
Basis difference on investments		533			559
Total deferred tax liabilities		9,262			8,479
Net deferred tax liabilities	$	(6,354	)	$	(4,015	)

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Consolidated Statements of Income (USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Income Statement [Abstract]
Revenues, net	$ 132,274	$ 103,732	$ 82,066
Operating costs and expenses:
Cost of revenues (excluding depreciation and amortization)	55,605	41,658	31,066
Product development	11,757	8,610	7,473
Sales and marketing	24,052	19,892	16,017
Other general and administrative expenses	18,342	13,452	10,760
Depreciation and amortization	7,852	6,661	5,412
Total operating costs and expenses	117,608	90,273	70,728
Income from operations	14,666	13,459	11,338
Other income (expense), net	176	118	10
Income before income tax provision	14,842	13,577	11,348
Income tax provision	6,424	5,932	4,404
Net income	$ 8,418	$ 7,645	$ 6,944
Net income per share:
Basic	$ 0.31	$ 0.29	$ 0.31
Diluted	$ 0.30	$ 0.28	$ 0.29
Weighted average shares of common stock outstanding:
Basic	26,853	26,128	22,445
Diluted	27,663	27,507	23,748

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Business Combinations

12 Months Ended

Dec. 31, 2013

Business Combinations [Abstract]

Business Combinations

5. BUSINESS COMBINATIONS

On June 29, 2012, the Company acquired all of the stock of Decision Critical, Inc., (DCI) an Austin, Texas based company that specializes in learning and competency management products for acute-care hospitals. The Company acquired DCI to further advance its suite of workforce development solutions. The consideration paid for DCI consisted of approximately $3.4 million in cash and 22,124 shares of our common stock. Also, the Company may make additional payments of up to $300,000, contingent upon achievement of certain financial targets and business outcomes within a three year period after the closing date. As of December 31, 2013, approximately $146,000 of these contingent payments have been paid to the DCI shareholders. The Company incurred approximately $203,000 in transaction costs associated with the DCI acquisition, which are included on the accompanying consolidated statements of income under the caption “other general and administrative.” In allocating the purchase price, the Company recorded approximately $2.9 million of goodwill, $1.5 million of identifiable intangible assets, $291,000 of net tangible assets and $456,000 of deferred tax liabilities. The goodwill balance is primarily attributed to assembled workforce, expanded market opportunities from DCI’s workforce development products, and expected synergies from integrating DCI’s products into our platform. The goodwill balance is not deductible for U.S. income tax purposes. The net tangible assets include deferred revenue, which in accordance with US GAAP, was adjusted down from a book value of $548,000 to an estimated fair value of $356,000. The deferred revenue recorded represents the estimated fair value of the contractual obligation assumed as of the acquisition date. The $192,000 write-down of deferred revenue resulted in lower revenues than would have otherwise been recognized for such services. The results of operations for DCI have been included in the Company’s consolidated financial statements from the date of acquisition, and are included in the HealthStream Workforce Development Solutions segment.

On October 19, 2012, the Company acquired all of the stock of Sy.Med Development, Inc. (Sy.Med), a Brentwood, Tennessee based company that specializes in credentialing related software products for healthcare providers. The Company acquired Sy.Med to further advance its suite of workforce development solutions. The consideration paid for Sy.Med consisted of approximately $7.4 million in cash and 34,060 shares of our common stock. The Company may make additional payments of up to $1.5 million, contingent upon achievement of certain financial targets and business outcomes within a two year period after the closing date. As of December 31, 2013, approximately $625,000 of these contingent payments have been paid to the Sy.Med shareholders. The Company incurred approximately $165,000 in transaction costs associated with the Sy.Med acquisition, which are included on the accompanying consolidated statements of income under the caption “other general and administrative.” In allocating the purchase price, the Company recorded approximately $5.4 million of goodwill, $6.5 million of identifiable intangible assets, $294,000 of net tangible assets and $2.8 million of deferred tax liabilities. The goodwill balance is primarily attributed to assembled workforce, additional market opportunities of Sy.Med’s credentialing software, and expected synergies from integrating Sy.Med’s products into our platform. The goodwill balance is not deductible for U.S. income tax purposes. The net tangible assets include deferred revenue, which was adjusted down from a book value of $1.1 million to an estimated fair value of $229,000. The $916,000 write-down of deferred revenue resulted in lower revenues than would have otherwise been recognized for such services. The results of operations for Sy.Med have been included in the Company’s consolidated financial statements from the date of acquisition, and are included in the HealthStream Workforce Development Solutions segment.

On September 9, 2013, the Company acquired substantially all of the assets of Baptist Leadership Group (BLG), a Pensacola, Florida based company that provides consulting services focused on patient-centered performance excellence in healthcare. The Company acquired BLG to strengthen its Research/Patient Experience Solutions. The consideration paid for BLG consisted of approximately $7.4 million in cash (taking into account the working capital adjustment) and 15,230 shares of our common stock. The Company incurred approximately $145,000 in transaction costs associated with the acquisition, which are included on the accompanying consolidated statements of income under the caption “other general and administrative.” In allocating the purchase price, the Company recorded approximately $6.3 million of goodwill, $1.6 million of identifiable intangible assets, and $28,000 of net tangible assets. The goodwill balance is primarily attributed to the assembled workforce, additional market opportunities from BLG’s consulting services, and expected synergies from integrating BLG into the operations of the HealthStream Research/Patient Experience Solutions segment. The goodwill balance is deductible for U.S. income tax purposes. The net tangible assets include deferred revenue, which was adjusted down from a book value of $508,000 to an estimated fair value of $254,000. The $254,000 write-down of deferred revenue resulted in lower revenues than would have otherwise been recognized for such services. The results of operations for BLG have been included in the Company’s consolidated financial statements from the date of acquisition, and are included in the HealthStream Research/Patient Experience Solutions segment.

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Marketable Securities

12 Months Ended

Dec. 31, 2013

Investments Debt And Equity Securities [Abstract]

Marketable Securities

4. MARKETABLE SECURITIES

At December 31, 2013 and 2012, the fair value of marketable securities, which were all classified as available for sale, included the following (in thousands):

	December 31, 2013
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value
Level 2:
Certificates of deposit	$	2,260	$	—	$	—		$	2,260
Corporate debt securities		46,430		—		(31	)		46,399
Subtotal		48,690		—		(31	)		48,659
Total	$	48,690	$	—	$	(31	)	$	48,659
	December 31, 2012
	Adjusted Cost		Unrealized Gains		Unrealized Losses			Fair Value
Level 1:
Mutual funds	$	5,042	$	30	$	—		$	5,072
Level 2:
Certificates of deposit		2,254		—		—			2,254
Commercial paper		3,122		1		—			3,123
Corporate debt securities		27,017		1		(17	)		27,001
U.S. government securities		14,499		3		—			14,502
Subtotal		46,892		5		(17	)		46,880
Total	$	51,934	$	35	$	(17	)	$	51,952

The carrying amounts reported in the consolidated balance sheet approximate fair value based on quoted market prices or alternative pricing sources and models utilizing market observable inputs. As of December 31, 2013, the Company does not consider any of its marketable securities to be other than temporarily impaired. During 2013, the Company recorded realized gains of approximately $5,000 from sales of marketable securities. All investments in marketable securities are classified as a current asset on the balance sheet because the underlying securities mature within one year from the balance sheet date.

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Litigation

12 Months Ended

Dec. 31, 2013

Commitments And Contingencies Disclosure [Abstract]

Litigation

16. LITIGATION

In the ordinary course of business, the Company is from time to time involved in various pending legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon the financial condition and/or results of operations of the Company. However, in the opinion of the Company’s management, matters currently pending or threatened against the Company are not expected to have a material adverse effect on the financial position or results of operations of the Company.

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Stock Based Compensation

12 Months Ended

Dec. 31, 2013

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Stock Based Compensation

12. STOCK BASED COMPENSATION

Stock Incentive Plans

The Company’s 2010 Stock Incentive Plan (2010 Plan) and 2000 Stock Incentive Plan (2000 Plan; collectively, the 2010 Plan and the 2000 Plan referred to as the Plan) authorize the grant of options, restricted share units (RSU), or other forms of stock based compensation to employees, officers, directors and others, and such grants must be approved by the Compensation Committee of the Board of Directors. Options granted under the Plan have terms of no more than ten years, with certain restrictions. The Plan allows the Compensation Committee of the Board of Directors to determine the vesting period and parameters of each grant. The vesting period of the options and RSUs granted has historically ranged from immediate vesting to annual vesting up to four years, beginning one year after the grant date. As of December 31, 2013, approximately 813,000 shares of unissued common stock remained reserved for future stock incentive grants under the Plan. The Company issues new shares of common stock when options are exercised or when RSUs become vested.

Stock Option Activity

A summary of activity and various other information relative to stock options for the year ended December 31, 2013 is presented in the tables below (in thousands, except exercise price).

				Weighted-
	Common			Average		Aggregate
	Shares			Exercise Price		Intrinsic Value
Outstanding at beginning of period		1,914		$	4.29
Granted		—			—
Exercised		(1,073	)		3.15
Expired		—			—
Forfeited		(4	)		6.11
Outstanding at end of period		837		$	5.73	$	22,514
Exercisable at end of period		594		$	5.06	$	16,375

The aggregate intrinsic value for stock options in the table above represents the total difference between the Company’s closing stock price on December 31, 2013 (the last trading day of the year) of $32.63 and the option exercise price, multiplied by the number of in-the-money options as of December 31, 2013. The weighted average remaining contractual term of options outstanding at December 31, 2013 was 3.8 years. Options exercisable at December 31, 2013 have a weighted average remaining contractual term of 3.4 years.

Other information relative to option activity during the three years ended December 31, 2013 is as follows (in thousands, except weighted average grant date fair value):

	2013		2012		2011
Weighted average grant date fair value of stock options granted	$	—	$	—	$	4.67
Total grant date fair value of stock options vested	$	723	$	878	$	644
Total intrinsic value of stock options exercised	$	25,846	$	4,992	$	4,539
Cash proceeds from exercise of stock options	$	3,318	$	823	$	1,242

Restricted Share Unit Activity

A summary of activity relative to RSUs for the year ended December 31, 2013 is follows (in thousands, except weighted average grant date fair value):

	Number of RSU’s			Weighted- Average Grant Date Fair Value		Aggregate Intrinsic Value
Outstanding at beginning of period		73		$	23.22
Granted		80			22.02
Vested		(16	)		23.07
Forfeited		—			—
Outstanding at end of period		137		$	22.53	$	4,466

The aggregate fair value of RSU awards that vested in 2013, as of the respective vesting dates, was approximately $345,000. A portion of RSUs that vested in 2013 were net-share settled such that the Company withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The total shares withheld for RSUs during 2013 were 2,210, and were based on the value of the RSUs on their respective vesting dates as determined by the Company’s closing stock price. One stock option exercise was net-share settled during 2013, resulting in 7,606 shares withheld for settlement of employee tax obligations. Total payments related to RSUs and stock options for the employees’ tax obligations to taxing authorities were approximately $164,000 in 2013, and are reflected as a financing activity within the Consolidated Statements of Cash Flows. These net-share settlements had the effect of share repurchases by the Company as they reduced and retired the number of shares that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company.

Stock Based Compensation

Total stock based compensation expense recorded for the three years ended December 31, 2013, which is recorded in our statements of income, is as follows (in thousands):

	Years Ended December 31,
	2013		2012		2011
Cost of revenues (excluding depreciation and amortization)	$	81	$	45	$	41
Product development		144		133		179
Sales and marketing		175		151		104
Other general and administrative		1,058		807		464
Total stock based compensation expense	$	1,458	$	1,136	$	788

The Company amortizes the fair value of all stock based awards, net of estimated forfeitures, on a straight-line basis over the requisite service period, which generally is the vesting period. As of December 31, 2013, total unrecognized compensation expense related to non-vested stock options and RSU’s was approximately $2.5 million, net of estimated forfeitures, with a weighted average expense recognition period remaining of 2.3 years. The Company realized approximately $3.7 million of excess tax benefits during the year ended December 31, 2013, which was recorded as an increase to common stock.

Stock based compensation cost for RSU’s is measured based on the closing fair market value of the Company’s stock on the date of grant. Stock based compensation cost for stock options is estimated at the grant date based on the fair value calculated using the Black-Scholes method. The Company did not grant any stock options during 2013 or 2012. The ranges of assumptions used for determining the estimated fair value of stock options during 2011 were as follows:

Risk-free interest rate	1.05 – 2.39%
Expected dividend yield	0.0%
Expected life (in years)	5 to 7
Expected forfeiture rate	0-5%
Volatility	50%

Risk-free interest rate is based on the U.S. Treasury rate in effect at the time of the option grant having a term equivalent to the expected life of the option.

Expected dividend yield is zero because the Company has not made any dividend payments in its history and does not plan to pay dividends in the foreseeable future.

Expected life is the period of time the option is expected to remain outstanding, and is based on historical experience. The contractual option life ranges from eight to ten years. The Company estimated the expected life of options granted to members of management to be five years and seven years for directors.

Expected forfeiture rate is the estimated percentage of options granted that are not expected to become fully vested. This estimate is based on historical experience, and will be adjusted as necessary to match the actual forfeiture experience.

Volatility is the measure of the amount by which the price is expected to fluctuate. The Company estimated volatility based on the actual historical volatility of the Company’s common stock, and management believes future volatility will be similar to the Company’s historical volatility experience.

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Collaborative Arrangement

12 Months Ended

Dec. 31, 2013

Organization Consolidation And Presentation Of Financial Statements [Abstract]

Collaborative Arrangement

8. COLLABORATIVE ARRANGEMENT

The Company participates in a collaborative arrangement, SimVentures^TM, with Laerdal Medical A/S (Laerdal Medical). The Company receives 50 percent of the profits or losses generated from this collaborative arrangement. The parties did not form a separate legal entity as part of the collaborative arrangement; therefore, the Company accounts for SimVentures as a collaborative arrangement in accordance with applicable accounting guidance. For the year ended December 31, 2013, the Company recorded approximately $2.3 million of revenues and $2.3 million of expenses related to the collaborative arrangement. For the year ended December 31, 2012, the Company recorded approximately $1.7 million of revenues and $1.7 million of expenses related to the collaborative arrangement. The Company also recorded approximately $0.9 million and $1.3 million of capitalized software development costs for SimVentures during 2013 and 2012, respectively.

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Stock Based Compensation - Other Information Relative to Option Activity (Detail) (USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]
Weighted average grant date fair value of stock options granted			$ 4.67
Total grant date fair value of stock options vested	$ 723	$ 878	$ 644
Total intrinsic value of stock options exercised	25,846	4,992	4,539
Cash proceeds from exercise of stock options	$ 3,318	$ 823	$ 1,242

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Goodwill

12 Months Ended

Dec. 31, 2013

Goodwill And Intangible Assets Disclosure [Abstract]

Goodwill

6. GOODWILL

Goodwill is evaluated for impairment at least annually to determine whether it is more likely than not that the fair value of the reporting units exceed their carrying value. If this assessment concludes that is more likely than not that the fair value of a reporting unit exceeds its carrying value, then goodwill is not considered impaired and no further impairment testing is required. Qualitative factors are considered for this assessment, such as, financial performance, industry and market comparables, and other factors affecting the reporting unit. If the assessment concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, a goodwill impairment test is performed to compare the fair value of the reporting unit to its carrying value. The Company determines fair value of the reporting units using both income and market based models. Under these methods, the technique used to determine fair value is sensitive to estimates and assumptions associated with cash flow from operations and its growth, discount rates, and reporting unit terminal values. The Company performs its annual impairment evaluation of goodwill during the fourth quarter of each year and as changes in facts and circumstances indicate impairment exists. During the annual impairment evaluation in the fourth quarter of 2013 and 2012, the results of our assessment indicated goodwill was not impaired.

During 2013, the Company acquired Baptist Leadership Group, and during 2012, the Company acquired Decision Critical, Inc. and Sy.Med Development, Inc. The changes in the carrying amount of goodwill for the years ended December 31, 2013 and 2012 are as follows (in thousands):

	Workforce Development		Research/Patient Experience		Total
Balance at January 1, 2013	$	11,459	$	17,840	$	29,299
Acquisition of Sy.Med Development, Inc.		133		—		133
Acquisition of Baptist Leadership Group		—		6,314		6,314
Balance at December 31, 2013	$	11,592	$	24,154	$	35,746
	Workforce Development		Research/Patient Experience		Total
Balance at January 1, 2012	$	3,307	$	17,840	$	21,147
Acquisition of Sy.Med Development, Inc.		5,291		—		5,291
Acquisition of Decision Critical, Inc.		2,861		—		2,861
Balance at December 31, 2012	$	11,459	$	17,840	$	29,299

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Intangible Assets

12 Months Ended

Dec. 31, 2013

Goodwill And Intangible Assets Disclosure [Abstract]

Intangible Assets

7. INTANGIBLE ASSETS

All intangible assets are considered to have finite useful lives. Customer related intangibles are amortized over their estimated useful lives ranging from eight to ten years. Other intangible assets include non-competition agreements, technology and patents, and trade names, and are being amortized over periods ranging from five to nine years. Amortization of intangible assets was approximately $1.5 million, $1.1 million, and $0.9 million, for the years ended December 31, 2013, 2012 and 2011, respectively.

Identifiable intangible assets are comprised of the following (in thousands):

	As of December 31, 2013							As of December 31, 2012
	Gross Amount		Accumulated Amortization			Net		Gross Amount		Accumulated Amortization			Net
Customer related	$	16,889	$	(10,145	)	$	6,744	$	15,619	$	(8,969	)	$	6,650
Other		3,370		(1,244	)		2,126		3,222		(1,067	)		2,155
Total	$	20,259	$	(11,389	)	$	8,870	$	18,841	$	(10,036	)	$	8,805

The expected future annual amortization expense for the years ending December 31, is as follows (in thousands):

2014	$	1,569
2015		1,211
2016		1,122
2017		1,092
2018		990
Thereafter		2,886
Total	$	8,870

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Content Rights and Deferred Service Credits

12 Months Ended

Dec. 31, 2013

Nonmonetary Transactions [Abstract]

Content Rights and Deferred Service Credits

9. CONTENT RIGHTS AND DEFERRED SERVICE CREDITS

During 2012, the Company entered into a renewal agreement with a customer in which the Company was provided continued rights to distribute and resell courseware owned by the customer. In exchange for the receipt of an exclusive license to distribute and resell this courseware, the Company has provided, and will continue to provide, the customer with service credits that can be exchanged for future purchases of the Company’s products and services. The value assigned to the content rights and the deferred service credits was $500,000, which represents the estimated fair value of the assets relinquished. The content rights are classified within other prepaid expenses and other assets, and the deferred service credits are classified within accrued liabilities and other long-term liabilities on our condensed consolidated balance sheets.

These exchangeable service credits will be issued annually through December 31, 2016, and will expire twenty-four months after issuance. Any unused credits will be forfeited upon expiration. During 2012 and 2013, the Company issued exchangeable service credits of $100,000, respectively, in accordance with this agreement, and is obligated to issue remaining service credits of $100,000 annually through 2016. The content rights are being amortized on a straight-line basis through December 31, 2016. Revenues for products or services provided in exchange for these service credits will be recognized in accordance with the Company’s revenue recognition policies.

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Employee Benefit Plan - Additional Information (Detail)	12 Months Ended
	Dec. 31, 2013
Defined Contribution Pension And Other Postretirement Plans Disclosure [Abstract]
Employees minimum age eligibility to participate in plan	21 years
Minimum number of days required to be eligible for participation in plan	30 days
Maximum contribution allowed to a plan member	20.00%

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Leases - Additional Information (Detail) (USD $) In Millions, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Leases [Abstract]
Total rent expense under all operating leases	$ 2.4	$ 2.2	$ 1.9

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Stock Based Compensation - Fair Value of Stock Option Granted, Assumptions (Detail)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2011
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Risk-free interest rate, minimum		1.05%
Risk-free interest rate, maximum		2.39%
Expected dividend yield	0.00%	0.00%
Expected forfeiture rate, minimum		0.00%
Expected forfeiture rate, maximum		5.00%
Volatility		50.00%
Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected life (in years)	5 years	5 years
Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected life (in years)	7 years	7 years

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Leases (Tables)

12 Months Ended

Dec. 31, 2013

Leases [Abstract]

Future Rental Payment Commitments under Non-Cancelable Operating Leases

Future rental payment commitments at December 31, 2013 under non-cancelable operating leases, with initial terms of one year or more, are as follows (in thousands):

2014	$	2,665
2015		2,062
2016		1,359
2017		446
2018		59
Thereafter		—
Total minimum lease payments	$	6,591

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Business Segments - Business Segment Information Based on Assets (Detail) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Segment Reporting Information [Line Items]
Segment assets	$ 212,594	$ 174,528	$ 154,237
Purchases of property and equipment	4,444	4,316	4,115
Payments associated with capitalized software development	4,267	4,435	6,065
Operating Segments [Member] | Workforce Development [Member]
Segment Reporting Information [Line Items]
Segment assets	60,013	46,693	27,322
Purchases of property and equipment	2,598	1,728	1,577
Payments associated with capitalized software development	3,712	3,536	5,720
Operating Segments [Member] | Research/Patient Experience [Member]
Segment Reporting Information [Line Items]
Segment assets	34,727	23,978	26,088
Purchases of property and equipment	171	120	44
Payments associated with capitalized software development	555	899	345
Unallocated [Member]
Segment Reporting Information [Line Items]
Segment assets	117,854	103,857	100,827
Purchases of property and equipment	$ 1,675	$ 2,468	$ 2,494

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Debt

12 Months Ended

Dec. 31, 2013

Debt Disclosure [Abstract]

Debt

14. DEBT

At December 31, 2013 and 2012, the Company had no debt outstanding.

Revolving Credit Facility

The Company maintains a Loan Agreement (the “Revolving Credit Facility”) with SunTrust Bank (“SunTrust”) in the aggregate principal amount of $20.0 million, which matures on July 21, 2014. The obligations under the revolving credit facility are guaranteed by each of the Company’s subsidiaries. The Company’s borrowings under the revolving credit facility bear interest at the 30-Day LIBOR Rate plus a margin of either 175 or 200 basis points determined in accordance with a pricing grid. Principal is payable in full on the maturity date. The Company is required to pay a commitment fee of 25 basis points per annum of the average daily unused portion of the revolving credit facility.

The purpose of the revolving credit facility is for general working capital needs, permitted acquisitions (as defined in the Loan Agreement), and for stock repurchase and/or redemption transactions that the Company may authorize.

The revolving credit facility contains certain covenants that, among other things, restrict additional indebtedness, liens and encumbrances, changes to the character of the Company’s business, acquisitions, asset dispositions, mergers and consolidations, sale or discount of receivables, creation or acquisitions of additional subsidiaries, and other matters customarily restricted in such agreements.

In addition, the revolving credit facility requires the Company to meet certain financial tests, including, without limitation:

• a maximum total leverage ratio (consolidated debt/consolidated EBITDA) of 2.0 to 1.0;

• funded debt to total capitalization may not exceed 40%; and

• tangible net worth may not be less than $1.00

As of December 31, 2013, the Company believes it was in compliance with all covenants. There were no balances outstanding on the revolving credit facility as of December 31, 2013.

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Summary of Significant Accounting Policies (Tables)

12 Months Ended

Dec. 31, 2013

Accounting Policies [Abstract]

Changes in the Allowance for Doubtful Accounts and the Amounts Charged to Bad Debt Expense

Changes in the allowance for doubtful accounts and the amounts charged to bad debt expense for the years ended December 31, were as follows (in thousands):

	Allowance Balance at Beginning of Period		Charged to Costs and Expenses		Write-offs			Allowance Balance at End of Period
2013	$	142	$	115	$	(46	)	$	211
2012	$	149	$	120	$	(127	)	$	142
2011	$	157	$	50	$	(58	)	$	149

Estimated Useful Lives of Property and Equipment

	Years
Furniture and fixtures		5-10
Equipment		3-5

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Content Rights and Deferred Service Credits - Additional Information (Detail) (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012
Deferred Revenue Arrangement [Line Items]
Value assigned to content rights and the deferred service credits	$ 500,000
Exchangeable service credits expiration period	24 months
Exchangeable service credits issued during period	100,000	100,000
Exchangeable remaining service credits to be issued	$ 100,000
Acquisition of Content Rights in Exchange for Future Services [Member]
Deferred Revenue Arrangement [Line Items]
Content rights and deferred service credits, description	The Company entered into a renewal agreement with a customer in which the Company was provided continued rights to distribute and resell courseware owned by the customer. In exchange for the receipt of an exclusive license to distribute and resell this courseware, the Company has provided, and will continue to provide, the customer with service credits that can be exchanged for future purchases of the Company’s products and services.

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Marketable Securities - Fair Value of Available for Sale Marketable Securities (Detail) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2013	Dec. 31, 2012
Schedule of Available-for-sale Securities [Line Items]
Available for sale securities, Adjusted Cost	$ 48,690	$ 51,934
Available for sale securities, Unrealized Gains		35
Available for sale securities, Unrealized Losses	(31)	(17)
Available for sale securities, Fair Value	48,659	51,952
Level 2 [Member]
Schedule of Available-for-sale Securities [Line Items]
Available for sale securities, Adjusted Cost	48,690	46,892
Available for sale securities, Unrealized Gains		5
Available for sale securities, Unrealized Losses	(31)	(17)
Available for sale securities, Fair Value	48,659	46,880
Level 2 [Member] | Certificates of Deposit [Member]
Schedule of Available-for-sale Securities [Line Items]
Available for sale securities, Adjusted Cost	2,260	2,254
Available for sale securities, Fair Value	2,260	2,254
Level 2 [Member] | Corporate Debt Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Available for sale securities, Adjusted Cost	46,430	27,017
Available for sale securities, Unrealized Gains		1
Available for sale securities, Unrealized Losses	(31)	(17)
Available for sale securities, Fair Value	46,399	27,001
Level 2 [Member] | Commercial Paper [Member]
Schedule of Available-for-sale Securities [Line Items]
Available for sale securities, Adjusted Cost		3,122
Available for sale securities, Unrealized Gains		1
Available for sale securities, Fair Value		3,123
Level 2 [Member] | U.S. Government Securities [Member]
Schedule of Available-for-sale Securities [Line Items]
Available for sale securities, Adjusted Cost		14,499
Available for sale securities, Unrealized Gains		3
Available for sale securities, Fair Value		14,502
Level 1 [Member] | Mutual Funds [Member]
Schedule of Available-for-sale Securities [Line Items]
Available for sale securities, Adjusted Cost		5,042
Available for sale securities, Unrealized Gains		30
Available for sale securities, Fair Value		$ 5,072

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Consolidated Statements of Comprehensive Income (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2012	Dec. 31, 2011
Statement Of Income And Comprehensive Income [Abstract]
Net income	$ 8,418	$ 7,645	$ 6,944
Other comprehensive income, net of taxes:
Unrealized gain (loss) on marketable securities	(49)	25	(2)
Total other comprehensive income (loss)	(49)	25	(2)
Comprehensive income	$ 8,369	$ 7,670	$ 6,942

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Earnings Per Share

12 Months Ended

Dec. 31, 2013

Earnings Per Share [Abstract]

Earnings Per Share

3. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share for the three years ended December 31, 2013 (in thousands, except per share amounts):

	2013		2012		2011
Numerator:
Net income	$	8,418	$	7,645	$	6,944
Denominator:
Weighted-average shares outstanding		26,853		26,128		22,445
Effect of dilutive shares		810		1,379		1,303
Weighted-average diluted shares		27,663		27,507		23,748
Basic earnings per share	$	0.31	$	0.29	$	0.31
Diluted earnings per share	$	0.30	$	0.28	$	0.29

Potentially dilutive shares representing approximately 70,000, 105,000, and 247,000 shares of common stock for 2013, 2012, and 2011, respectively, were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive.

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Stock Based Compensation - Additional Information (Detail) (USD $)	12 Months Ended
	Dec. 31, 2013	Dec. 31, 2011
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unissued common stock reserved for future stock option grants	813,000
Closing stock price	$ 32.63
Weighted average remaining contractual term of options, outstanding	3 years 9 months 18 days
Weighted average remaining contractual term of options, exercisable	3 years 4 months 24 days
Payments related to RSUs and stock options for the employees' tax obligations to taxing authorities	$ 164,000
Weighted average expense recognition period	2 years 3 months 18 days
Excess tax benefits realized	3,700,000
Expected dividend yield	0.00%	0.00%
RSUs [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Aggregate fair value of RSU awards that vested	345,000
Shares withheld for RSUs	2,210
Stock option exercise net-share settled	7,606
Payments related to RSUs and stock options for the employees' tax obligations to taxing authorities	164,000
Total unrecognized compensation expense related to non-vested stock options	$ 2,500,000
Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Contractual option life range	8 years
Expected life (in years)	5 years	5 years
Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Contractual option life range	10 years
Expected life (in years)	7 years	7 years
Maximum [Member] | RSUs [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting period of the options and RSU's granted	4 years
Maximum [Member] | Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Term of options granted	10 years

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Earnings Per Share (Tables)

12 Months Ended

Dec. 31, 2013

Earnings Per Share [Abstract]

Computation of Basic and Diluted Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share for the three years ended December 31, 2013 (in thousands, except per share amounts):

	2013		2012		2011
Numerator:
Net income	$	8,418	$	7,645	$	6,944
Denominator:
Weighted-average shares outstanding		26,853		26,128		22,445
Effect of dilutive shares		810		1,379		1,303
Weighted-average diluted shares		27,663		27,507		23,748
Basic earnings per share	$	0.31	$	0.29	$	0.31
Diluted earnings per share	$	0.30	$	0.28	$	0.29

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Shareholders' Equity - Additional Information (Detail)	Dec. 31, 2013	Dec. 31, 2012
Equity [Abstract]
Common stock, shares authorized	75,000,000	75,000,000
Common stock, shares issued	27,327,000	26,233,000
Common stock, shares outstanding	27,327,000	26,233,000
Preferred stock, shares authorized	10,000,000
Preferred stock, shares outstanding	0

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Employee Benefit Plan

12 Months Ended

Dec. 31, 2013

Compensation And Retirement Disclosure [Abstract]

Employee Benefit Plan

13. EMPLOYEE BENEFIT PLAN

401(k) Plan

The Company has a defined-contribution employee benefit plan (401(k) Plan) incorporating provisions of Section 401(k) of the Internal Revenue Code. Employees must have attained the age of 21 and have completed thirty days of service to be eligible to participate in the 401(k) Plan. Under the provisions of the 401(k) Plan, a plan member may make contributions, on a tax-deferred basis, not to exceed 20% of compensation, subject to IRS limitations. The Company has not provided matching contributions through December 31, 2013.