<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 21, 1999
REGISTRATION NO. 333-76899
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
HEALTHGATE DATA CORP.
(Exact name of registrant as specified in its charter)
------------------------------
<TABLE>
<S> <C> <C>
DELAWARE 7379 04-3220927
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization) 25 CORPORATE DRIVE, SUITE 310
BURLINGTON, MASSACHUSETTS 01803
(781) 685-4000
</TABLE>
(Address, including zip code and telephone number, including area code, of
registrant's principal executive offices)
------------------------------
WILLIAM S. REECE
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
HEALTHGATE DATA CORP.
25 CORPORATE DRIVE, SUITE 310
BURLINGTON, MASSACHUSETTS 01803
(781) 685-4000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
STEPHEN M. KANE, ESQ. DANIELLE CARBONE, ESQ.
RICH, MAY, BILODEAU & FLAHERTY, P.C. SHEARMAN & STERLING
294 WASHINGTON STREET 599 LEXINGTON AVENUE
BOSTON, MASSACHUSETTS 02108 NEW YORK, NEW YORK 10022
(617) 482-1360 (212) 848-4000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
------------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED (1) SHARE (2) PRICE FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 par value.................... 5,290,000 $12.00 $63,480,000 $17,648(3)
</TABLE>
(1) Includes 690,000 shares which the underwriters have an option to purchase
from HealthGate Data Corp. to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
(3) Includes $14,387 previously paid in connection with the initial filing and
$3,261 which is being paid in connection with Amendment No. 1.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED , 1999
PROSPECTUS
4,600,000 Shares
[LOGO]
Common Stock
This is an initial public offering of shares of common stock of HealthGate
Data Corp. HealthGate expects that the public offering price will be between
$10.00 and $12.00 per share.
We have applied for admission for trading and quotation of our common stock
on the Nasdaq National Market under the symbol "HGAT."
Our business involves significant risks. These risks are described under the
caption "Risk Factors" beginning on page 9.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
---------------------
<TABLE>
<S> <C> <C>
Per Share Total
Public offering price........................................... $ $
Underwriting discounts and commissions.......................... $ $
Proceeds, before expenses, to HealthGate........................ $ $
</TABLE>
The underwriters may also purchase up to an additional 690,000 shares of
common stock at the public offering price, less the underwriting discounts and
commissions, to cover over-allotments.
The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.
---------------------
SG COWEN
BANC OF AMERICA SECURITIES LLC
VOLPE BROWN WHELAN & COMPANY
, 1999
<PAGE>
[The inside cover contains pictures of our healthgate.com Web site and a
co-branded CHOICE Web site and other pages displaying our content, technology
and advertising and sponsorship opportunities.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page
<S> <C> <C> <C>
Prospectus Summary............................... 5 Management....................................... 56
Risk Factors..................................... 9 Certain Transactions............................. 63
Use of Proceeds.................................. 23 Principal Stockholders........................... 64
Dividend Policy.................................. 23 Description of Capital Stock..................... 66
Capitalization................................... 24 Shares Eligible for Future Sale.................. 69
Dilution......................................... 25 Underwriting..................................... 72
Selected Consolidated Financial Data............. 26 Legal Matters.................................... 73
Management's Discussion and Analysis of Experts.......................................... 73
Financial Condition and Results of Where You Can Find More Information.............. 74
Operations..................................... 29 Consolidated Financial Statements................ F-1
Business......................................... 38
</TABLE>
---------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. WE
ARE OFFERING TO SELL AND SEEKING OFFERS TO BUY SHARES OF OUR COMMON STOCK ONLY
IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED
IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS,
REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR
COMMON STOCK.
---------------------
UNTIL , 1999, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
WE HAVE REGISTERED THE TRADEMARKS "HEALTHGATE," "HEALTHGATE DATA," "MEDGATE"
AND "READER" IN THE UNITED STATES AND HAVE FILED TRADEMARK REGISTRATION
APPLICATIONS FOR "CHOICE," "ACTIVEPRESS" AND THE HEALTHGATE LOGO IN THE UNITED
STATES. ALL OTHER TRADEMARKS, SERVICE MARKS OR TRADE NAMES REFERRED TO IN THIS
PROSPECTUS ARE THE PROPERTY OF THEIR RESPECTIVE OWNERS.
<PAGE>
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING IS ONLY A SUMMARY. YOU SHOULD CAREFULLY READ THE MORE DETAILED
INFORMATION CONTAINED IN THIS PROSPECTUS, INCLUDING OUR CONSOLIDATED FINANCIAL
STATEMENTS AND RELATED NOTES. OUR BUSINESS INVOLVES SIGNIFICANT RISKS. YOU
SHOULD CAREFULLY CONSIDER THE INFORMATION UNDER THE HEADING "RISK FACTORS."
UNLESS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES: (1) THE
CONVERSION OF ALL OUTSTANDING SHARES OF OUR PREFERRED STOCK INTO 8,666,019
SHARES OF COMMON STOCK UPON THE CLOSING OF THIS OFFERING; (2) THE DECLARATION
AND EFFECTIVENESS OF A 4.564 -FOR-1 STOCK SPLIT BEFORE THE EFFECTIVENESS OF THIS
OFFERING; AND (3) NO EXERCISE BY THE UNDERWRITERS OF THE OVER-ALLOTMENT OPTION.
THE COMPANY
HealthGate is a leading Internet provider of reliable, objective,
comprehensive and up-to-date healthcare information helping physicians and other
healthcare professionals, patients and health-conscious consumers make better
informed healthcare decisions. We have aggregated and developed what we believe
are the most extensive health and medical libraries of any online provider,
currently totaling approximately 27 million different pages of health and
medical information from over 190 sources representing 27 independent content
providers. In March 1999, our users viewed approximately 3.76 million content
pages on our own Web sites.
Given the depth and breadth of our content, we provide healthcare
information to a wide range of online users. Our online library targeted to
physicians and other healthcare professionals includes internationally
recognized journals such as the NEW ENGLAND JOURNAL OF MEDICINE, bibliographic
databases such as MEDLINE, handbooks such as the Drug Information Handbook,
decision support materials such as the Poisoning and Toxicology Compendium and
Continuing Medical Education programs from the Boston University School of
Medicine and Professional Postgraduate Services. Our patient focused online
library includes patient education materials such as a series of over 3,000
patient education brochures published by the Clinical Reference Systems division
of Access Health. We have also created a proprietary series of industry
recognized consumer health Webzines, which are magazines distributed exclusively
through the Web, and have developed Wellness Centers, which are compilations of
selected information for consumers from our online libraries, on 100 of the most
prevalent illnesses, diseases and medical conditions.
We adapt and integrate this diverse content through our internally developed
software programs, which include our proprietary ReADER-Registered Trademark-
natural language searching software, designed to facilitate the search and
retrieval of relevant information in response to each user's searching needs. In
addition, our activePress-TM- service uses our technology to provide text
conversion and Web site hosting services for traditional print publishers.
We distribute our content through a network of proprietary and affiliated
Web sites that comprise the HealthGate Network. The HealthGate Network includes:
(1) our own Web sites, www.healthgate.com in the United States and
www.healthgate.co.uk in the United Kingdom;
(2) customized, co-branded CHOICE-TM- Web sites developed for hospitals and
other enterprises which carry both HealthGate's and the enterprise
customer's names; and
(3) other third party Web sites to which we syndicate our proprietary and
licensed content.
Subject specific Web sites dedicated to healthcare are one of the most
popular segments of the Internet. According to Cyber Dialogue, Inc., an industry
research firm, during the 12-month period ended July 1998, approximately 17
million adults in the United States searched online for health and medical
information, a number which Cyber Dialogue estimates will grow to approximately
33 million
5
<PAGE>
in 2000. We believe that with our extensive content libraries and distribution
network we are positioned to capture a leading share of the online health
audience as this industry continues to grow.
Key elements of our growth strategy include:
- providing comprehensive healthcare content and technology by continually
expanding our health and medical content libraries and integrating this
content with technology in order to enhance the online user experience;
- expanding the HealthGate Network by increasing the number of co-branded
CHOICE Web sites through expanded marketing efforts and by continuing to
syndicate our content libraries to other health related Web sites;
- continuing to build awareness of the HealthGate brand in order to attract
additional users, advertisers and strategic affiliates;
- broadening the range of offered products and services to better serve
existing users, attract new users and keep users on the HealthGate Network
for longer periods of time, as well as to more fully leverage multiple
revenue opportunities provided by the HealthGate Network;
- pursuing an acquisition and affiliation strategy focusing on proprietary
content and complementary technologies and services; and
- continuing to grow internationally by establishing additional HealthGate
country-specific Web sites and by syndicating portions of our content
libraries to online providers in foreign markets.
We generate revenue from the following activities:
(1) developing co-branded CHOICE Web sites for enterprise clients and
distributing content through these CHOICE Web sites;
(2) offering banner advertising and sponsorship of discrete portions of our
content libraries to pharmaceutical companies, other healthcare
advertisers and other businesses and organizations;
(3) providing our activePress Web publishing services to traditional print
publishers;
(4) syndicating content to third party Web sites; and
(5) participating in electronic commerce opportunities, also known as
e-commerce.
We are incorporated under the laws of the State of Delaware and our
executive offices are located at 25 Corporate Drive, Suite 310, Burlington,
Massachusetts 01803. Our telephone number is (781) 685-4000.
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock we are offering...................... 4,600,000 shares
Common stock to be outstanding after this
offering.......................................... 18,500,444 shares
Underwriters' over-allotment option............... 690,000 shares
Use of proceeds................................... To fund operating losses and to expand
our sales and marketing efforts, to
repay outstanding indebtedness and for
general corporate purposes, including
content development and licensing,
advertising and brand promotion, working
capital and acquisitions or investments.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol............ HGAT
</TABLE>
The number of shares of our common stock to be outstanding immediately after
the offering is based on the number of shares outstanding on May 10, 1999. This
number does not take into account 2,395,497 shares of our common stock subject
to options outstanding under our stock option plans or other option agreements
at May 10, 1999. This number also does not take into account outstanding
warrants to purchase 549,551 shares of our common stock at May 10, 1999.
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Unaudited pro forma basic and diluted net loss per share have been
calculated assuming the conversion of all outstanding preferred stock into
common stock, as if the shares had converted immediately upon their issuance.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
------------------------------- ------------------------
1996 1997 1998 1998 1999
--------- --------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total revenue........................................ $ 408 $ 1,285 $ 2,434 $ 626 $ 615
Total costs and expenses............................. 3,120 3,820 4,975 944 2,077
Loss from operations................................. (2,712) (2,535) (2,541) (318) (1,462)
Net loss............................................. (2,726) (2,541) (2,878) (335) (1,620)
Preferred stock dividends and accretion of preferred
stock to redemption value.......................... 264 540 594 149 149
Net loss attributable to common stockholders......... (2,990) (3,081) (3,472) (484) (1,769)
Basic and diluted net loss per share attributable to
common stockholders................................ $ (.57) $ (.59) $ (.66) $ (.09) $ (.34)
Shares used in computing basic and diluted net loss
per share attributable to common stockholders...... 5,228 5,229 5,233 5,229 5,234
Unaudited pro forma basic and diluted net loss per
share.............................................. -- -- $ (.27) $ (.15)
Shares used in computing unaudited pro forma basic
and diluted net loss per share..................... -- -- 10,610 10,611
</TABLE>
7
<PAGE>
The following table contains a summary of our balance sheet:
- on an actual basis at March 31, 1999;
- on a pro forma basis to reflect the issuance of 720,757 shares of Series E
preferred stock and conversion of a $2,000,000 note payable; and
- on a pro forma as adjusted basis at March 31, 1999 to reflect (a) the sale
of 4,600,000 shares of common offered hereby at an assumed initial public
offering price per share of $11.00, (b) the conversion of all outstanding
shares of redeemable convertible preferred stock into 8,666,019 shares of
common stock, and (c) the repayment of a long-term note payable of
$1,453,000 with proceeds from the offering.
<TABLE>
<CAPTION>
(UNAUDITED)
-----------
<S> <C> <C> <C>
MARCH 31, 1999
-------------------------------------
<CAPTION>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................................... $ 102 $ 5,852 $ 49,852
Working capital (deficit)............................................... (1,810) 3,940 47,940
Total assets............................................................ 2,219 7,969 51,969
Long-term debt and capital lease obligations............................ 3,698 1,698 245
Redeemable convertible preferred stock.................................. 7,038 14,788 --
Common stock and other stockholders' equity (deficit)................... (11,381) (11,181) 49,060
</TABLE>
8
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN
INVESTMENT DECISION. YOU SHOULD ALSO REFER TO THE OTHER INFORMATION IN THIS
PROSPECTUS, INCLUDING OUR FINANCIAL STATEMENTS AND THE RELATED NOTES. THE RISKS
AND UNCERTAINTIES DESCRIBED BELOW ARE THOSE THAT WE CURRENTLY BELIEVE MAY
MATERIALLY AFFECT OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES THAT WE ARE
UNAWARE OF OR THAT WE CURRENTLY DEEM IMMATERIAL ALSO MAY BECOME IMPORTANT
FACTORS THAT AFFECT OUR COMPANY.
THIS PROSPECTUS ALSO CONTAINS FORWARD LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THE RISKS FACED BY US DESCRIBED BELOW AND ELSEWHERE IN THIS
PROSPECTUS.
RISKS RELATED TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY AND HAVE RECENTLY INTRODUCED NEW SERVICES
WHICH MAKES AN EVALUATION OF OUR BUSINESS BASED ON PAST OPERATING RESULTS
DIFFICULT.
We have been in business since February 1994, but we did not generate
revenue until January 1996. Through December 31, 1996, the majority of our
activities were related to development of products and services, exploration of
different sales and marketing channels, the build-up of hardware and software
infrastructure to support our healthgate.com Web site and the establishment of
the business, operations and financing of our company. Since 1997, we have
introduced new services and experienced significant growth in our operating
revenue relative to prior periods. Therefore, our historical financial
information is of limited value in evaluating our future operating results. An
investor in our common stock must consider the risks, expenses and difficulties
frequently encountered by companies in the early stages of development,
especially companies in a rapidly changing market like the market for Internet
services.
WE HAVE A HISTORY OF LOSSES AND WE EXPECT THAT LOSSES WILL CONTINUE THROUGH AT
LEAST 2000.
We have lost money in every period since we started our business, and as of
December 31, 1998, we had an accumulated deficit of approximately $10.5 million.
We plan to invest heavily to continue to develop and expand our content
libraries, to market our CHOICE Web sites, to attract traffic to our Web sites
at www.healthgate.com and www.healthgate.co.uk, to increase our customer base,
to upgrade our technology, to expand internationally and to continue to build
the HealthGate brand. As a result, we expect to continue to lose money through
at least 2000. We can not assure you that we will ever achieve or sustain
profitability or that our operating losses will not increase in the future.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY WHICH MAY AFFECT THE
MARKET PRICE OF OUR COMMON STOCK.
We expect our quarterly revenue, expenses and operating results to fluctuate
significantly in the future, which could affect the market price of our common
stock in a manner unrelated to our long-term operating performance. Quarterly
fluctuations could result from a number of factors, including:
- the amount and timing of our capital expenditures and other costs of
expanding our operations;
- the introduction of new products or services by us or our competitors;
- addition of new content providers or changes in our relationships with our
most important content providers, which may require expenditures weighted
toward the early stages of these relationships;
- the level of usage of the HealthGate Network and the Internet generally,
which could impact, among other things, recognition of revenue in
connection with advertising and sponsorship sales;
9
<PAGE>
- changes in the demand for and pricing of online healthcare information and
Internet advertising;
- seasonality of spending by the advertising industry, which is generally
lower in the first and third calendar quarters;
- technical difficulties or systems downtime affecting the Internet
generally or our ability to deliver products and services online; and
- our ability to successfully integrate operations and technologies from
acquisitions, joint ventures or other business combinations or
investments.
We expect to increase the level of activity and spending in our operations,
particularly in sales and marketing and research and development. We base our
expense levels in part upon our expectations concerning future revenue and these
expense levels are predominantly fixed in the short-term. If we have lower
revenue than expected, we may not be able to reduce our spending in the
short-term in response. Any shortfall in revenue would have a direct impact on
our results of operations. In this event, the price of our common stock may
fall. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
OUR BUSINESS PROSPECTS WILL SUFFER IF WE ARE NOT ABLE TO SUCCESSFULLY BUILD
RECOGNITION FOR THE HEALTHGATE BRAND.
We believe that increasing awareness of the HealthGate brand is important to
our ability to attract additional users, customers, advertisers, sponsors and
strategic partners. We believe the importance of brand recognition will increase
in the future as the number of Web sites providing healthcare information
products and services increases. We plan to allocate significant resources to
develop and build brand recognition by expanding the reach of the HealthGate
Network, primarily through increasing the number of CHOICE Web sites and
promoting our own Web sites. However, we can not assure you that our efforts to
build brand awareness will be successful.
WE FACE INTENSE COMPETITION IN PROVIDING OUR INTERNET-BASED HEALTHCARE
INFORMATION PRODUCTS AND SERVICES.
The market for Internet services and products is relatively new, intensely
competitive and rapidly changing. Since the Internet's commercialization in the
early 1990s, the number of Web sites on the Internet competing for users'
attention has proliferated with no substantial barriers to entry. There are more
than 15,000 Web sites offering users healthcare content, products and services,
and we expect that competition will continue to grow. We compete, directly and
indirectly, for subscribers, consumers, content and service providers,
advertisers, sponsors and acquisition candidates with the following types of
companies:
- publishers and distributors of traditional print media targeted to
healthcare professionals, patients and health-conscious consumers, many of
which have established or may establish their own Web sites;
- large healthcare information systems companies, such as McKesson HBOC and
Shared Medical Systems;
- online services or Web sites targeted to the healthcare industry
generally, such as WebMD, Medscape, Inteli-health, OnHealth and
drkoop.com;
- public sector and non-profit Web sites that provide healthcare information
without advertising or commercial sponsorships, such as the National
Library of Medicine and the American Medical Association;
10
<PAGE>
- Web sites, such as Yahoo!, America Online and Lycos, which provide access
to healthcare related information and services; and
- vendors of healthcare information, products and services distributed
through other means, including direct sales, mail and fax messaging.
Many of our competitors enjoy significant competitive advantages including:
greater resources that can be devoted to the development, promotion and sale of
their products and services; longer operating histories; greater brand
recognition; and larger customer bases.
We also compete with other Web sites, traditional print media and other
sources of healthcare information for a share of total advertising budgets. If
advertisers perceive the Internet or the HealthGate Network to be limited or
ineffective advertising media, they may be reluctant to devote a portion of
their advertising budget to Internet advertising or to advertising on the
HealthGate Network. See "Business--Competition."
OUR BUSINESS IS EXPANDING RAPIDLY AND OUR BUSINESS PROSPECTS MAY SUFFER IF OUR
MANAGEMENT IS NOT ABLE TO MANAGE OUR GROWTH.
Since we began our business in 1994, we have significantly expanded our
operations over a short period of time. We have grown from three employees at
the end of 1994 to 54 full-time employees as of March 31, 1999, and we expect to
add a significant number of additional personnel in the near future. We also
expect to increase our spending on technology to continue to expand and upgrade
our existing systems. Future growth may place substantial strain on our
management, operational and financial resources and systems. Our future success
will depend in large part on our ability to implement, improve and effectively
utilize our operational, management, marketing and financial systems and train
and manage our employees. We believe the successful integration of our senior
management will be critical to our ability to effectively address these needs.
Several members of our senior management joined us during 1998 or early 1999,
including Mary B. Miller, our Chief Financial Officer, and Hamid Tabatabaie, our
Vice President of Sales and Marketing. We can not guarantee that our management
team will be able to effectively manage the growth of our operations or that our
systems, procedures and controls will be adequate to support our expanding
operations.
WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR ACQUISITION STRATEGY
We expect to make acquisitions of, or significant investments in,
complementary companies, products or technologies to increase our content
libraries, technological capabilities and customer base. To date, we have not
made any major acquisitions or investments. To be successful, we will need to
identify content sources, technologies and businesses that are complementary to
ours, integrate disparate technologies and corporate cultures and possibly
manage a geographically dispersed company. Integrating newly acquired
organizations and technologies into our company could be expensive, time
consuming and may strain our resources. In addition, we may also lose key
employees while integrating any new companies. For these reasons, we may not be
successful in integrating any acquired businesses or technologies and may not
achieve anticipated revenue and cost benefits. If this occurs, our business,
results of operations and the market price of our common stock could be
adversely affected.
In addition, we may be required to amortize significant amounts of goodwill
and other intangible assets in connection with future acquisitions, which would
materially harm our results of operations and, in turn, the market price of our
common stock.
11
<PAGE>
COMPETITION FOR HIGHLY-SKILLED PERSONNEL IS INTENSE AND THE SUCCESS OF OUR
BUSINESS DEPENDS ON OUR ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL.
Our performance depends on the continued services and performance of our
executive officers and key employees, including William S. Reece, our President,
Chief Executive Officer and Chairman of the Board, Mary B. Miller, our Chief
Financial Officer and Treasurer, Mark A. Israel, our Chief Technology Officer,
Hamid Tabatabaie, our Vice President of Sales and Marketing and Rick Lawson, our
Vice President of Content and Secretary. We maintain key person life insurance
payable to us on Mr. Reece in the amount of $1 million. We do not maintain key
person life insurance policies on any other officers or employees. Our future
success also depends on our ability to identify, attract, hire, train, retain
and motivate highly skilled technical, managerial, editorial, marketing and
customer service personnel. Competition for highly-skilled personnel is intense.
In particular, skilled technical employees are highly sought after in the Boston
area, and we can not guarantee that we will be able to attract or retain these
employees.
THE SUCCESS OF OUR BUSINESS WILL DEPEND ON OUR ABILITY TO SELL ADVERTISING ON
THE HEALTHGATE NETWORK.
In the quarter ended March 31, 1999, we derived approximately 13% of our
revenue from the sale of general and targeted banner advertising on the
HealthGate Network and sponsorships of discrete topic areas on the HealthGate
Network. Under our sponsorship arrangements, a sponsor's name or a message
selected by the sponsor is included on each page of the topic area together with
a click-through link to the sponsor's Web site. Our future success depends on
our ability to generate and increase revenue from advertising and sponsorship
which will depend on a number of factors, including:
- the development of the Internet as an advertising medium;
- the amount of traffic on the HealthGate Network and the number of
registered and unique users of our content; and
- our ability to achieve and demonstrate registered and unique user
demographic characteristics that are attractive to sponsors and
advertisers.
Most of our advertisements to date have been sold on the basis of the number
of impressions, or times that an advertisement appears in page views downloaded
by users, rather than on the number of click-throughs, or user requests for
additional information made by clicking on the advertisement. We can not
guarantee that our advertising customers will accept our internal and third
party measurements of these impressions received by advertisements on the
HealthGate Network, or that these measurements will be free from errors. If we
are unable to accurately measure these impressions or have our advertising
customers accept these measurements, advertisers may not be willing to buy
advertising space from us. In addition, there are currently a variety of pricing
models for selling advertising on the Internet. It is difficult to predict which
model, if any, will emerge as the industry standard. This uncertainty makes it
difficult to project our future advertising rates and revenue that we may
generate from advertising.
THE PERFORMANCE OF OUR WEB SITES AND COMPUTER SYSTEMS IS CRITICAL TO OUR
BUSINESS AND OUR BUSINESS WILL SUFFER IF WE EXPERIENCE SYSTEM FAILURES.
The performance of our Web sites and computer systems is critical to our
reputation and ability to attract and retain users, customers, advertisers and
subscribers. We provide products and services based on sophisticated computer
and telecommunications software and systems, which often experience development
delays and may contain undetected errors or failures when introduced into our
existing systems. Although we have only experienced one minor unscheduled
service interruption since the beginning of 1998, we can not guarantee that we
will not experience more significant service interruptions in the future. We are
also dependent upon Web browsers and Internet service providers
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to provide Internet users access to our Web sites. Each of them has experienced
significant outages in the past and could experience outages, delays and other
difficulties in the future due to system failures. We also depend on certain
information providers to deliver information and data feeds to us on a timely
basis. Our Web sites could experience disruptions or interruptions in service
due to the failure or delay in the transmission or receipt of this information.
System errors or failures that cause a significant interruption in the
availability of our content or an increase in response time on our Web sites
could cause us to lose potential or existing users, customers, advertisers or
subscribers and could result in damage to our reputation and brand name or a
decline in our stock price.
Given our reliance on our own and third party computer and
telecommunications software and systems, any of the following occurrences could
cause response time delays or system failures on our Web sites:
- a sudden and significant increase in the number of users of our Web sites;
- any failure or delay in the transmission or receipt of downloads from our
content providers;
- any disruption in our Internet access through our third party Internet
service providers;
- any failure of our third party Internet service providers to handle higher
volumes of users; and
- fire, hurricanes, power loss, break-ins, computer viruses and other events
beyond our control.
In March 1999, we entered into a one year Internet Data Center Services
Agreement with Exodus Communications, Inc. to house all of our central computer
facility servers at Exodus's Internet Data Center in Waltham, Massachusetts. We
do not presently maintain fully redundant systems at separate locations, so our
operations depend on Exodus's ability to protect the systems in its data center
against damage from fire, power loss, water damage, telecommunications failure,
vandalism and similar events. Although Exodus provides comprehensive facilities
management services, including human and technical monitoring of all production
servers, Exodus does not guarantee that our Internet access will be
uninterrupted, error-free or secure. We have also developed a disaster recovery
plan to respond to system failures. We can not guarantee that our disaster
recovery plan is capable of being implemented successfully, if at all. Finally,
we maintain property insurance for our equipment, but do not maintain business
interruption insurance. We can not guarantee that our insurance will be adequate
to compensate us for all losses that may occur as a result of any system
failure.
WE RETAIN CONFIDENTIAL CUSTOMER INFORMATION IN OUR DATABASE AND IF WE FAIL TO
PROTECT SUCH INFORMATION AGAINST SECURITY BREACHES OUR BUSINESS MAY SUFFER.
We retain confidential customer information in our database. Therefore, it
is critical that our facilities and infrastructure remain secure and that they
are perceived by consumers to be secure. Despite the implementation of security
measures, our infrastructure may be vulnerable to physical break-ins, computer
viruses, programming errors or similar disruptive problems. A material security
breach could damage our reputation or result in liability to us, either of which
could adversely affect our business, results of operations, financial condition
and, in turn, the market price of our common stock.
WE MAY NEED TO OBTAIN ADDITIONAL FUNDS IN THE FUTURE TO SUPPORT OUR GROWTH.
We expect that the net proceeds from this offering, combined with our
current cash resources, will be sufficient to meet our requirements for at least
the next 24 months. However, we may need to raise additional financing to
support expansion, develop new or enhanced products and services, respond to
competitive pressures, acquire complementary businesses or technologies or take
advantage of unanticipated business opportunities. We may need to raise
additional funds by selling debt or equity securities, by entering into
strategic relationships or through other arrangements. We may be unable to
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raise any additional amounts on reasonable terms when they are needed. Any
additional equity financing may cause investors to experience dilution, and any
additional debt financing may result in restrictions on our operations or our
ability to pay dividends in the future.
OUR BUSINESS PROSPECTS MAY SUFFER IF WE ARE NOT ABLE TO KEEP UP WITH THE RAPID
TECHNOLOGICAL DEVELOPMENTS IN THE INTERNET INDUSTRY.
The Internet industry is characterized by rapid technological developments,
evolving industry standards, changes in user and customer requirements and
frequent new service and product introductions and enhancements. The
introduction of new technology or the emergence of new industry standards and
practices could render our systems and proprietary technology obsolete and
unmarketable or require us to make significant unanticipated investments in
research and development. To be successful, we must continue to license or
develop leading technology, enhance our existing products and services and
respond to emerging industry standards and practices on a timely and
cost-effective basis. If we are unable to successfully respond to these
developments, our business, results of operations, financial condition and, in
turn, the market price of our common stock could be adversely affected.
THE YEAR 2000 PROBLEM COULD SIGNIFICANTLY DISRUPT OUR OPERATIONS, CAUSING A
DECLINE IN CASH FLOW AND REVENUE AND OTHER DIFFICULTIES.
Many currently installed computer systems and software products are unable
to distinguish between twentieth century dates and twenty-first century dates.
As a result, many companies' software and computer systems may need to be
upgraded or replaced to comply with these Year 2000 requirements. Our business
is dependent on the operation of numerous systems that could potentially be
impacted by Year 2000 related problems.
We have made preliminary assessments of our Year 2000 readiness, with
emphasis on our operating and administrative systems and the proprietary
software systems and third party software and hardware we use to deliver
services to our customers. We plan to have completed our assessments and
remediation plans and expect to complete any necessary changes to our internal
systems and proprietary software by the end of June 1999. Many of our vendors of
material software, hardware and services have indicated that the products we use
are currently Year 2000 compliant. We are not currently aware of any internal
Year 2000 compliance problems that we expect to have a material adverse effect
on our business, without taking into account our efforts to avoid or fix these
problems. However, we can not guarantee that we have identified or will identify
all Year 2000 compliance problems in our infrastructure that may require
substantial revisions and fixes. Also, despite our testing and reviews, we may
experience Year 2000 problems related to the third party software, hardware or
other systems on which we are reliant, and any of these problems may be time
consuming or expensive to fix.
We believe that the most reasonably likely worst case scenario would result
in a prolonged Internet, telecommunications or electrical failure which would
affect our ability to meet our commitments to our customers or decrease the use
of the Internet, thus preventing our users from accessing our services. We have
given a warranty in our activePress agreement with Blackwell Science that our
applications and services are Year 2000 compliant. If our applications and
services fail to be Year 2000 compliant, this agreement could be terminated or
we could be liable for damages, either of which could have a material adverse
effect on our business. In addition, the purchasing patterns of customers or
potential customers may be affected by Year 2000 questions, and any significant
delays in purchasing decisions could also affect us. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Compliance Readiness Disclosure."
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OUR BUSINESS WOULD SUFFER IF WE WERE HELD LIABLE FOR INFORMATION RETRIEVED FROM
OUR WEB SITE.
As a publisher and distributor of online information, we may be subject to
third party claims for defamation, negligence, copyright or trademark
infringement or other theories based on the nature and content of information
supplied on our Web sites. We could also become liable if confidential
information is disclosed inappropriately. These types of claims have been
brought, sometimes successfully, against online service providers in the past.
We could be subject to liability with respect to content that may be accessible
through our Web sites or third party Web sites linked from our Web sites. For
example, claims could be made against us if material deemed inappropriate for
viewing by children could be accessed through our Web sites or if a
professional, patient or consumer relies on healthcare information accessed
through our Web sites to their detriment. Even if any of the kinds of claims
described above do not result in liability to us, we could incur significant
costs in investigating and defending against them and in implementing measures
to reduce our exposure to this kind of liability. Our insurance may not cover
potential claims of this type or may not be adequate to cover all costs incurred
in defense of potential claims or to indemnify us for all liability that may be
imposed.
WE DEPEND ON OUR CONTENT PROVIDERS, AS THE SUCCESS OF OUR BUSINESS DEPENDS ON
OUR ABILITY TO PROVIDE A COMPREHENSIVE LIBRARY OF HEALTHCARE INFORMATION.
With the exception of our Healthy Living series of Webzines, we license all
of our content from third parties. With a few exceptions, these licenses are
generally non-exclusive, have an initial term of one year and are renewable. In
addition, a significant number of these licenses permit cancellation by the
content provider upon 30 to 90 days notice. We can not guarantee that we will be
able to continue to license our present content or sufficient additional content
to provide a diverse and comprehensive library. In the future, we may not be
able to license content at reasonable cost. In addition, one or more of our
publishers or other content providers may grant one of our competitors an
exclusive arrangement with respect to a significant database or periodical, or
elect to compete directly against us by making its content exclusively available
through its own Web site. Presently, we believe it would be difficult to replace
the NEW ENGLAND JOURNAL OF MEDICINE and the journals made available by Blackwell
Science with other journals of the same reputation. These sources are committed
to us through February 2000 and April 2001, respectively, but if either of them
chooses not to renew the agreements they have with us, our business could be
adversely affected.
WE RELY ON OUR WEB-BASED MAGAZINES TO INCREASE TRAFFIC ON OUR WEB SITES.
A key element of our strategy involves our continued development of our
Healthy Living series of consumer oriented Webzines. Articles for our Webzines
are written by freelance medical writers who we engage to write specific
articles. If these medical writers and our editorial board are not successful in
producing articles for our Webzines that are topical, informative and timely, we
may fail to attract a significant number of users to our Web sites. Without
substantial traffic on our Web sites, we will be severely hindered in selling
advertising on our Web pages and in building the brand name recognition we
believe is necessary to be competitive.
THE MAJORITY OF OUR REVENUE HAS HISTORICALLY BEEN DERIVED FROM A FEW CUSTOMERS
AND THE LOSS OF ANY OF THESE CUSTOMERS COULD ADVERSELY AFFECT OUR BUSINESS.
Historically, we have generated a substantial portion of our revenue from a
few customers. For the year ended December 31, 1998, two customers, Blackwell
Science, one of our largest stockholders, and WebMD accounted for 44% and 18%,
respectively of our total revenue. We expect to continue to generate a
substantial portion of our revenue in the near future from these customers and
the loss of either could adversely affect our business.
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OUR DEALINGS WITH AND RELIANCE ON OUR AFFILIATES MAY GIVE RISE TO CONFLICTS OF
INTEREST.
Blackwell Science and its affiliates are collectively our largest customer,
accounting for approximately 44% of 1998 revenues. We are not certain that
Blackwell Science or its affiliates will continue to transact business with us
or that their ownership of our common stock will not influence the terms on
which they transact business with us in the future.
Because Blackwell Science and one of its affiliates hold significant amounts
of common stock, our relationship with these entities could give rise to
conflicts of interest.
OUR BUSINESS MAY SUFFER IF WE ARE NOT ABLE TO EFFECTIVELY PROTECT OUR
INTELLECTUAL PROPERTY RIGHTS.
We regard our trademarks, service marks, copyrights, trade secrets and
similar intellectual property as important to our business, and we rely upon
trademark and copyright law, trade secret protection and confidentiality and/or
license agreements with our employees, customers, strategic partners and others
to protect our rights in this property. We have registered our "HealthGate,"
"HealthGate Data," "MedGate" and "ReADER" trademarks in the U.S. and we have
pending U.S. applications for our HealthGate logo, "CHOICE" and "activePress"
trademarks. Effective trademark, copyright and trade secret protection may not
be available in every country in which our products and services are distributed
or made available through the Internet. Therefore, we can not guarantee that the
steps we have taken to protect our proprietary rights will be adequate to
prevent infringement or misappropriation by third parties or will be adequate
under the laws of some foreign countries which may not protect HealthGate's
proprietary rights to the same extent as do the laws of the United States.
It is possible that other businesses will adopt product or service names
similar to ours. This may hinder our ability to build brand identity and
possibly lead to customer confusion. In the future, we may have to litigate
against these businesses and others to enforce and protect our trademarks,
service marks, trade secrets, copyrights and other intellectual property rights.
Any enforcement litigation would divert management resources and be expensive
and may not effectively protect our intellectual property.
Although we believe that our proprietary rights do not infringe on the
intellectual property rights of others, other parties may assert infringement
claims against us or claim that we have violated a patent or infringed a
copyright, trademark or other proprietary rights belonging to them. These
claims, even if they are without merit, could result in our spending a
significant amount of time and money to dispose of them.
We license almost all of our content from third parties. Under most of our
license agreements, the licensor has agreed to defend and indemnify us for
losses with respect to third-party claims that the licensed content infringes
third party proprietary rights. However, we can not assure you that these
provisions will be adequate to protect us from infringement claims.
OUR BUSINESS MAY SUFFER IF WE ARE UNABLE TO CONTINUE TO LICENSE SOFTWARE THAT IS
NECESSARY FOR THE DEVELOPMENT OF PRODUCT AND SERVICE ENHANCEMENTS.
We rely on a variety of technologies that are licensed from third parties,
including our database software and Internet server software, which is used in
our Web sites to perform key functions. These third party licenses may not be
available to us on commercially reasonable terms in the future. The loss of or
inability to maintain any of these licenses could delay the introduction of
software enhancements, interactive tools and other features until equivalent
technology could be licensed or developed.
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RISKS RELATED TO OUR INDUSTRY
OUR BUSINESS PROSPECTS DEPEND ON THE CONTINUED GROWTH IN USE OF THE INTERNET.
We believe that our future success will require the continued development
and widespread acceptance of the Internet and online services as a medium for
obtaining and distributing healthcare and medical information. Internet use is
at an early stage of development and may be inhibited by a number of factors,
such as:
- Internet infrastructure which is not able to support the demands placed on
it, or its performance and reliability declining as usage increases;
- security concerns with respect to transmission over the Internet of
confidential information, such as credit card numbers;
- privacy concerns; and
- governmental regulation.
OUR BUSINESS PROSPECTS ARE UNCERTAIN, AS THE MARKET FOR ONLINE HEALTHCARE
INFORMATION AND SERVICES IS STILL DEVELOPING.
The online healthcare information market is in the early stages of
development, is rapidly evolving and is characterized by an increasing number of
market entrants who have introduced competing products and services. As is
typical in the case of a new and rapidly evolving industry, demand and market
acceptance for recently introduced products and services are subject to a high
level of uncertainty and risk. Therefore, it is difficult to predict with any
assurance the size of the market for online healthcare information or its growth
rate. We can not guarantee that physicians, hospitals and other healthcare
providers and consumers will view obtaining healthcare information through the
Internet as an acceptable way to address their healthcare information needs.
OUR BUSINESS PROSPECTS DEPEND ON THE USE OF THE INTERNET AS AN ADVERTISING
MEDIUM.
Most potential advertisers and their advertising agencies have only limited
experience with the Internet as an advertising medium and have not devoted a
significant portion of their advertising expenditures to Internet-based
advertising. Therefore, it is too early to know whether advertisers or
advertising agencies will be persuaded to allocate portions of their budgets to
Internet-based advertising or, if so persuaded, whether they will find
Internet-based advertising to be an effective means of promoting their products
and services relative to traditional print and broadcast media. Acceptance of
the Internet among advertisers and advertising agencies will depend, to a large
extent, on the level of use of the Internet by consumers and upon growth in the
commercial use of the Internet, neither of which has yet been proven.
There is intense competition for advertising revenue on high-traffic Web
sites, which has resulted in significant price competition. Currently, there are
a variety of pricing models for selling advertising on the Internet. Several of
the most popular pricing models are based on the number of impressions or
click-throughs, the duration over which an advertisement is displayed or the
number of keywords to which the advertisement will be linked. It is difficult to
predict which, if any, will emerge as the industry standard. This uncertainty
makes it difficult to project our future advertising rates and revenue that we
may generate from advertising. In addition, filter software programs that limit
or prevent advertising from being delivered to a Web users' computers are
available. It is unclear whether this type of software will become widely
accepted. However, if it does, it would negatively affect Internet-based
advertising, as advertisers will be less likely to advertise on the Internet if
they have no assurance they will reach their desired audience.
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GOVERNMENT REGULATION OF THE INTERNET MIGHT RESULT IN THE IMPOSITION OF ACCESS
FEES WHICH COULD ADVERSELY AFFECT OUR BUSINESS.
Currently, there are a number of laws that regulate communications or
commerce on the Internet. Several telecommunications carriers have petitioned
the Federal Communications Commission to regulate Internet service providers and
online service providers in a manner similar to long distance telephone carriers
and to impose access fees on these providers. Regulation of this type, if
imposed, could substantially increase the cost of communicating on the Internet,
and, in turn, adversely affect our business, results of operations and the
market price of our common stock.
PRIVACY RELATED REGULATION OF THE INTERNET COULD ADVERSELY AFFECT OUR BUSINESS.
Internet user privacy has become an issue both in the United States and
abroad. The Federal Trade Commission and government agencies in some states and
countries have been investigating certain Internet companies regarding their use
of personal information. Any regulations imposed to protect the privacy of
Internet users may affect the way in which we currently collect and use personal
information.
The European Union (EU) has adopted a directive that imposes restrictions on
the collection and use of personal data, guaranteeing citizens of EU member
states certain rights, including the right of access to their data, the right to
know where the data originated and the right to recourse in the event of
unlawful processing. We can not assure you that this directive will not
adversely affect our activities in EU member states.
As is typical with most Web sites, our Web sites place certain information
(cookies) on a user's hard drive without the user's knowledge or consent. This
technology enables Web site operators to target specific users with a particular
advertisement and to limit the frequency with which a user is shown a particular
advertisement. Some currently available Internet browsers allow users to modify
their browser settings to remove cookies at any time or to prevent cookies from
being stored on their hard drives. In addition, some Internet commentators,
privacy advocates and governmental bodies have suggested limiting or eliminating
the use of cookies. If this technology is reduced or limited, the Internet may
become less attractive to advertisers and sponsors.
A feature of our own Web sites includes the retention of personal
information about our users. We have a stringent privacy policy covering this
information. However, if third parties were able to penetrate our network
security and gain access to, or otherwise misappropriate, our users' personal
information, we could be subject to liability. Such liability could include
claims for misuses of personal information, such as for unauthorized marketing
purposes or unauthorized use of credit cards. These claims could result in
litigation, our involvement in which, regardless of the outcome, could require
us to expend significant financial resources. We could incur additional expenses
if new regulations regarding the use of personal information are introduced or
if any regulator chooses to investigate our privacy practices.
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NEW TAX TREATMENT OF COMPANIES ENGAGED IN INTERNET COMMERCE MAY ADVERSELY AFFECT
THE INTERNET INDUSTRY AND OUR COMPANY.
Tax authorities on the federal, state, and local levels are currently
reviewing the appropriate tax treatment of companies engaged in Internet
commerce. New state tax regulations may subject us to additional state sales,
income and other taxes. A recently passed federal law places a temporary
moratorium on certain types of taxation on Internet commerce. We can not predict
the effect of current attempts at taxing or regulating commerce over the
Internet. It is also possible that the governments of other states and foreign
countries also might attempt to regulate our transmission of content on our Web
sites and throughout the rest of the HealthGate Network. Any new legislation,
regulation or application or interpretation of existing laws would likely
increase our cost of doing business and may adversely affect our results of
operations and, in turn, the market price of our common stock.
GOVERNMENTAL OR OTHER LICENSING BODIES MAY FILE CLAIMS AGAINST US BASED ON THE
MEDICAL NATURE OF THE CONTENT WE MAKE AVAILABLE TO PATIENTS AND OTHER CONSUMERS.
States and other licensing and accrediting authorities prohibit the
unlicensed practice of medicine. We do not believe that our publication and
distribution of healthcare information online comprises practicing medicine.
However, we can not guarantee that one or more states or other governmental
bodies will not assert claims contrary to our belief. Any claims of this nature
could result in our spending a significant amount of time and money to defend
and dispose of them.
RISKS RELATED TO THIS OFFERING
IT IS POSSIBLE THAT NO ACTIVE TRADING MARKET FOR OUR COMMON STOCK DEVELOPS.
Prior to this offering there was no public market for our common stock. We
cannot predict the extent to which investor interest in our company will lead to
the development of an active trading market or how liquid that market might
become.
OUR COMMON STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO SELL YOUR
SHARES AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE.
The stock market in general, and the market for technology and Internet
related companies in particular, has experienced extreme price and volume
fluctuations, in particular over the last 12 months. These broad market and
industry fluctuations may adversely affect the market price of our common stock,
regardless of our actual operating performance. The initial public offering
price for the shares of our common stock will be determined by negotiations
between us and the representatives of the underwriters and may not be indicative
of prices that will prevail in the market. You may not be able to resell your
shares at or above the initial public offering price due to a number of factors,
including:
- changes in the market valuations of other Internet or online service
companies;
- actual or anticipated quarterly fluctuations in our operating results;
- changes in expectations of future financial performance or changes in
estimates of securities analysts;
- announcements of technological innovations;
- announcements relating to strategic relationships;
- customer relationship developments; and
- conditions affecting the Internet or healthcare industries.
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VOLATILITY OF OUR COMMON STOCK PRICE MAY EXPOSE US TO SECURITIES LITIGATION.
In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted. If this were to happen to HealthGate, litigation would be expensive
and would divert management's attention from then-existing business operations.
In addition, any litigation that resulted in liability against HealthGate could
have a materially adverse effect on our business, financial condition and, in
turn, the market price of our common stock.
OUR MANAGEMENT WILL HAVE SUBSTANTIAL DISCRETION OVER THE USE OF PROCEEDS OF THIS
OFFERING AND OUR COMMON STOCK PRICE MAY SUFFER IF SUCH PROCEEDS ARE NOT USED IN
A MANNER THAT LEADS TO THE GROWTH OF OUR BUSINESS.
We estimate that the net proceeds from the sale of common stock offered by
us will be approximately $45 million. We intend to use approximately $2 million
of the net proceeds to repay outstanding indebtedness under a subordinated term
loan. We intend to use the remainder of the net proceeds to fund operating
losses and the expansion of our sales and marketing efforts and for general
corporate purposes, including content development and licensing, advertising and
brand promotion and working capital. We may also use a portion of the proceeds
for the acquisition of or investment in companies, technologies or assets that
complement our business. However, we have not determined the amounts we plan to
expend in any of these areas or the timing of these expenditures. Consequently,
our board of directors and management will have significant flexibility in using
the net proceeds of this offering. In the event our board of directors and
management decide to use these proceeds in a manner that does not lead to the
growth of our business, the market price of our common stock may decline. See
"Use of Proceeds."
INVESTORS WILL INCUR IMMEDIATE DILUTION.
The initial offering price of our common stock will be substantially higher
than the pro forma net tangible book value per share of the outstanding common
stock immediately after the offering. If you purchase common stock in this
offering, you will incur immediate and substantial dilution in the pro forma net
tangible book value per share of the common stock from the price you pay for
common stock. Assuming an initial public offering price of $11.00 per share, you
will experience a net tangible book value dilution per share of $8.35. We also
have a large number of outstanding stock options and warrants to purchase the
common stock with exercise prices significantly below the estimated initial
public offering price of the common stock. To the extent that these options and
warrants are exercised, there will be further dilution. See "Dilution."
OUR OFFICERS, DIRECTORS AND THEIR AFFILIATED ENTITIES WILL HAVE SIGNIFICANT
CONTROL OF HEALTHGATE AFTER THIS OFFERING.
After this offering, our officers and directors will own approximately 22%
of our outstanding common stock. In addition, entities with which our outside
directors are affiliated will own approximately 24% of our outstanding common
stock. If our officers, directors and their affiliated entities act together,
they will be able to significantly influence the management and affairs of
HealthGate and will have the ability to control most matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. This concentration of ownership may have the
effect of delaying, deferring or preventing an acquisition of HealthGate and may
adversely affect the market price of our common stock. See "Principal
Stockholders."
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OUR CERTIFICATE OF INCORPORATION AND BYLAWS INCLUDE ANTI-TAKEOVER PROVISIONS
WHICH MAY DETER OR PREVENT A TAKEOVER ATTEMPT.
Some provisions of our certificate of incorporation and bylaws and
provisions of Delaware law may deter or prevent a takeover attempt, including an
attempt that might result in a premium over the market price for our common
stock. See "Description of Capital Stock--Anti-takeover Effects of Provisions of
the Restated Charter and Restated Bylaws." These provisions include:
STAGGERED BOARD OF DIRECTORS. Our board of directors is divided into three
classes serving terms currently expiring in 2000, 2001 and 2002. These staggered
terms may limit the ability of holders of common stock to complete a change of
control, by delaying the appointment of new directors.
STOCKHOLDER PROPOSALS. Our stockholders must give advance notice, generally
60 days prior to the relevant meeting, for stockholder nominations of candidates
for our board of directors and for certain other business to be conducted at any
stockholders' meeting. This limitation on stockholder proposals could inhibit a
change of control by delaying action on any proposed change in control until the
annual meeting of stockholders.
PREFERRED STOCK. Our certificate of incorporation authorizes our board of
directors to issue up to shares of preferred stock having such
rights as may be designated by our board of directors, without shareholder
approval. This issuance of preferred stock could inhibit a change in control by
making it more difficult to acquire the majority of our voting stock.
DELAWARE ANTITAKEOVER STATUTE. The Delaware corporation law restricts
certain business combinations with interested stockholders upon their acquiring
15% or more of our common stock. This law may have the effect of inhibiting a
non-negotiated merger or other business combination.
FUTURE SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT OUR STOCK PRICE.
The market price for our common stock could fall substantially if our
stockholders sell large amounts of our common stock in the public market
following this offering. These sales, or the possibility that these sales may
occur, could also make it more difficult for us to sell equity or equity related
securities if we need to do so in the future to address then-existing financing
needs. The number of shares of common stock available for sale in the public
market is limited by restrictions under federal securities law requiring the
registration or exemption from registration in connection with the sale of
securities. In addition, sales of our common stock are restricted by lock-up
agreements that we, our directors and officers and most of our existing
stockholders have entered into with the underwriters. The lock-up agreements
restrict us, our directors and officers and substantially all of our existing
stockholders, from selling or otherwise disposing of any shares for a period of
180 days after the date of this prospectus without the prior written consent of
SG Cowen Securities Corporation. SG Cowen Securities Corporation may, however,
in its sole discretion and without notice, release all or any portion of the
shares from the restrictions in the lock-up agreements.
After this offering, we will have 18,500,444 outstanding shares of common
stock. These shares will become eligible for sale in the public market as
follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE ELIGIBLE FOR PUBLIC RESALE
- --------------------------- ----------------------------------------------------------------
<S> <C>
Date of this prospectus (includes the 4,600,000 shares sold in
this offering)
180 days after the date of this prospectus
At various times thereafter through .
</TABLE>
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We intend to file one or more registration statements to register shares of
common stock subject to outstanding stock options and common stock reserved for
issuance under our stock option plan after the expiration of the 180-day lockup.
We expect the additional registration statement to become effective immediately
upon filing. In addition, upon completion of this offering and the conversion of
our outstanding preferred stock into common stock, which will happen upon the
completion of this offering, the holders of approximately 8,666,019 shares of
our common stock will have the right to require us to register their shares for
sale to the public. If these holders cause a large number of shares to be
registered and sold in the public market, our stock price could fall. See
"Shares Eligible for Future Sale."
WE HAVE NO INTENTION TO PAY DIVIDENDS.
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain all future earnings to finance the expansion of our
business.
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USE OF PROCEEDS
We estimate that the net proceeds to us from the sale of the 4,600,000
shares of common stock in this offering will be approximately $45 million ($52
million if the underwriters' over-allotment is exercised in full), assuming an
initial public offering price of $11.00 per share and after deducting estimated
underwriting discounts and commissions and offering expenses payable by us. The
primary purposes of this offering are to provide working capital, to create a
public market for our common stock and to facilitate our future access to public
capital markets.
We expect to use $1,453,000 of the net proceeds of this offering to repay
all of the indebtedness outstanding under a subordinated note. This note bears
interest at the fixed rate of 13% per year and is scheduled to mature on March
26, 2003.
We expect to use the remainder of the net proceeds of this offering to
finance operations while we continue to incur operating losses, to expand our
sales and marketing efforts and for general corporate purposes, including
content development and licensing, advertising and brand promotion and working
capital. We may also use a portion of the proceeds for the acquisition of or
investment in companies, technologies or assets that complement our business. We
have not determined the amounts we plan to spend on any of these areas or the
timing of these expenditures. As a result, our management will have broad
discretion to allocate the net proceeds from this offering. Pending these uses,
we intend to invest the net proceeds of this offering in short term, investment
grade, interest bearing instruments.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
currently intend to retain all future earnings to finance the expansion of our
business and, therefore, do not anticipate declaring or paying any cash
dividends on our common stock in the foreseeable future.
23
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of HealthGate as of March
31, 1999 (1) on an actual basis at March 31, 1999, (2) on a pro forma basis at
March 31, 1999 to reflect the issuance of 720,757 shares of Series E preferred
stock and conversion of a $2,000,000 note payable, and (3) on a pro forma as
adjusted basis at March 31, 1999 to reflect (a) the sale of 4,600,000 shares of
common stock offered hereby at an assumed initial public offering price per
share of $11.00, (b) the conversion of all outstanding shares of redeemable
convertible preferred stock into 8,666,019 shares of common stock, and (c) the
repayment of a long-term note payable of $1,453,000 with proceeds from this
offering. This information should be read in conjunction with HealthGate's
financial statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, 1999
----------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------------- -------------- --------------
<S> <C> <C> <C>
Long-term portion of capital lease obligations................... $ 244,803 $ 244,803 $ 244,803
Note payable to related party.................................... 2,000,000 -- --
Long-term note payable........................................... 1,453,395 1,453,395 --
-------------- -------------- --------------
Total notes payable and long-term capital lease
obligations................................................ 3,698,198 1,698,198 244,803
-------------- -------------- --------------
Redeemable convertible preferred stock, $.01 par value:
Series A--1,000 shares authorized, issued and outstanding
actual; none issued or outstanding pro forma as adjusted... 682,665 682,665 --
Series B--1,000 shares authorized, issued and outstanding
actual; none issued or outstanding pro forma as adjusted... 2,096,059 2,096,059 --
Series C--1,000 shares authorized, issued and outstanding
actual; none issued or outstanding pro forma as adjusted... 1,256,396 1,256,396 --
Series D--1,667 shares authorized, issued and outstanding
actual; none issued or outstanding pro forma as adjusted... 3,003,018 3,003,018 --
Series E--720,757 shares authorized, issued and outstanding
actual; none issued or outstanding pro forma as adjusted... -- 7,750,000 --
-------------- -------------- --------------
Total redeemable convertible preferred stock............... 7,038,138 14,788,138 --
-------------- -------------- --------------
Common stock and other stockholders' equity (deficit):
Common stock, $.01 par value: 20,000,000 shares authorized
actual, and 20,000,000 shares authorized pro forma as
adjusted; 5,234,425 shares issued and outstanding actual,
and 18,500,444 shares issued and outstanding pro forma as
adjusted................................................... 52,344 52,344 185,004
Additional paid-in capital....................................... 2,653,930 10,603,930 70,712,803
Accumulated deficit.............................................. (12,230,404) (19,980,404) (19,980,404)
Deferred compensation............................................ (1,857,050) (1,857,050) (1,857,050)
-------------- -------------- --------------
Total common stock and other stockholders' equity
(deficit)................................................ (11,381,180) (11,181,180) 49,060,353
-------------- -------------- --------------
Total capitalization....................................... $ (644,844) $ 5,305,156 $ 49,305,156
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
24
<PAGE>
DILUTION
The pro forma net tangible book value of HealthGate as of March 31, 1999 was
$3.6 million, or $.26 per share of common stock. Pro forma net tangible book
value per share represents the amount of total tangible assets less total
liabilities, divided by the number of shares of common stock outstanding after
giving effect to:
- the issuance of 720,757 shares of Series E preferred stock and conversion
of a $2,000,000 note payable and
- the conversion of all outstanding preferred stock into 8,666,019 shares of
common stock upon the closing of the offering.
After giving effect to the sale of 4,600,000 shares of common stock we are
offering at an assumed initial public offering price of $11.00 per share and
after deducting estimated underwriting discounts and commissions and offering
expenses, HealthGate's pro forma net tangible book value as of March 31, 1999
would have been approximately $49.1 million, or $2.65 per share. This represents
an immediate increase in pro forma net tangible book value of $2.39 per share to
existing stockholders and an immediate dilution of $8.35 per share to new
investors purchasing shares of common stock in the offering. The following table
illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................................................ $ 11.00
Pro forma net tangible book value per share at March 31, 1999................................ $ .26
Increase attributable to the offering........................................................ 2.39
---------
Pro forma net tangible book value per share after the offering................................. 2.65
---------
Net tangible book value dilution per share to new investors in the offering.................... $ 8.35
---------
---------
</TABLE>
The following table summarizes, as of March 31, 1999, on the pro forma basis
described above, the total number of shares and consideration paid to HealthGate
and the average price per share paid by the existing stockholders and by new
investors purchasing shares of common stock in this offering at an assumed
initial public offering price of $11.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders................................. 13,900,444 75.1% $ 6,896,237 12.0% $ .50
New Investors......................................... 4,600,000 24.9% 50,600,000 88.0% 11.00
------------ ----- ------------- ----- -----------
Totals.......................................... 18,500,444 100.0% $ 57,496,237 100.0% $ 3.11
------------ ----- ------------- ----- -----------
------------ ----- ------------- ----- -----------
</TABLE>
This discussion and table assumes no exercise of options outstanding under
HealthGate's stock option plans. As of March 31, 1999, there were options
outstanding to purchase a total of 2,209,797 shares of common stock at a
weighted average exercise price of $.84 per share. To the extent that any of
these options are exercised, there will be further dilution to new investors.
25
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with our financial statements and the related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," appearing elsewhere in this prospectus. The consolidated statement
of operations data for the years ended December 31, 1996, 1997 and 1998, and the
consolidated balance sheet data as of December 31, 1997 and 1998, are derived
from, and qualified by reference to, our audited financial statements included
elsewhere in this prospectus. The consolidated statement of operations data for
the period from inception (February 8, 1994) through December 31, 1994 and for
year ended December 31, 1995, and the consolidated balance sheet data as of
December 31, 1994, 1995 and 1996 are derived from our audited financial
statements that do not appear in this prospectus. The selected financial data as
of March 31, 1999, and for the three months ended March 31, 1998 and 1999 are
derived from unaudited financial statements included elsewhere in this
prospectus. In the opinion of management, the unaudited financial statements
have been prepared on a basis consistent with the audited financial statements
which appear elsewhere in this prospectus and include all adjustments, which are
only normal recurring adjustments, necessary for a fair presentation of the
financial position and results of operations for the unaudited periods. The
historical results are not necessarily indicative of the operating results to be
expected in the future.
Unaudited pro forma basic and diluted net loss per share have been
calculated assuming the conversion of all outstanding preferred stock into
common stock, as if the shares had converted immediately upon their issuance.
26
<PAGE>
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(FEBRUARY 8,
1994) (UNAUDITED)
THROUGH THREE MONTHS ENDED MARCH
DECEMBER 31, YEAR ENDED DECEMBER 31, 31,
----------------- ------------------------------------------ ------------------------
1994 1995 1996 1997 1998 1998 1999
----------------- --------- --------- --------- --------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Total revenue....................... $ -- $ 1 $ 408 $ 1,285 $ 2,434 $ 626 $ 615
Cost and expenses:
Cost of revenue................... -- 15 492 912 1,181 255 363
Research and development.......... 12 447 980 891 1,450 231 753
Sales and marketing............... -- 98 1,080 1,496 1,414 301 552
General and administrative........ 27 252 568 521 930 157 409
------ --------- --------- --------- --------- ----------- -----------
Total costs and expenses........ 39 812 3,120 3,820 4,975 944 2,077
Loss from operations................ (39) (811) (2,712) (2,535) (2,541) (318) (1,462)
------ --------- --------- --------- --------- ----------- -----------
Net loss............................ (39) (815) (2,726) (2,541) (2,878) (335) (1,620)
Preferred stock dividends and
accretion of preferred stock to
redemption value.................. -- 65 264 540 594 149 149
------ --------- --------- --------- --------- ----------- -----------
Net loss attributable to common
stockholders...................... (39) (880) (2,990) (3,081) (3,472) (484) (1,769)
------ --------- --------- --------- --------- ----------- -----------
------ --------- --------- --------- --------- ----------- -----------
Basic and diluted net loss per share
attributable to common
stockholders...................... $ (0.01) $ (0.18) $ (0.57) $ (0.59) $ (0.66) $ (0.09) $ (0.34)
Shares used in computing basic and
diluted net loss per share
attributable to common
stockholders...................... 4,616 4,948 5,228 5,229 5,233 5,229 5,234
Unaudited pro forma basic and
diluted net loss per share........ $ (0.27) $ (0.15)
Shares used in computing unaudited
pro forma basic and diluted net
loss per share.................... 10,610 10,611
</TABLE>
27
<PAGE>
The following table contains a summary of our balance sheet:
- on an actual basis at December 31, 1994, 1995, 1996, 1997 and 1998 and
March 31, 1999;
- on a pro forma as adjusted basis at March 31, 1999 to reflect (a) the
issuance of 720,757 shares of Series E preferred stock and conversion of a
$2,000,000 note payable, (b) the sale of 4,600,000 shares of common stock
offered hereby at an assumed initial public offering price per share of
$11.00, (c) the conversion of all outstanding shares of redeemable
convertible preferred stock into 8,666,019 shares of common stock, and (d)
the repayment of a long-term note payable of $1,453,000 with proceeds from
this offering.
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, 1999
DECEMBER 31, -----------------------------------
----------------------------------------------------- PROFORMA
1994 1995 1996 1997 1998 ACTUAL PROFORMA AS ADJUSTED
--------- --------- --------- --------- --------- ---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............ $ 4 $ 105 $ 1,156 $ 29 $ 961 $ 102 5,852 $ 49,852
Working capital (deficit)............ (2) (216) 585 (867) -- (1,810) 3,940 47,940
Total assets......................... 4 612 1,791 781 2,371 2,219 7,969 51,969
Long-term debt and capital lease
obligations........................ -- 172 79 17 3,655 3,698 1,698 245
Redeemable convertible preferred
stock.............................. -- 845 4,763 6,295 6,889 7,038 14,788 --
Common stock and other stockholders'
equity (deficit)................... (2) (757) (3,740) (6,821) (9,735) (11,381) (11,181) 49,060
</TABLE>
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES WHICH APPEAR ELSEWHERE IN THIS
PROSPECTUS. THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN
FACTORS, INCLUDING THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS PROSPECTUS,
PARTICULARLY UNDER THE HEADING "RISK FACTORS."
OVERVIEW
HealthGate is a leading Internet provider of reliable, objective,
comprehensive and up-to-date healthcare information helping physicians and other
healthcare professionals, patients and health-conscious consumers make better
informed healthcare decisions. We have aggregated and developed what we believe
are the most extensive health and medical libraries of any online provider,
currently totaling approximately 27 million different pages of health and
medical information from over 190 sources. This content includes internationally
recognized journals, authoritative government sources and extensive
bibliographic databases representing 27 independent content providers. We adapt
and integrate this diverse content through our internally developed software
programs, which includes our proprietary ReADER-Registered Trademark- natural
language searching software, in order to facilitate search and retrieval of
relevant information. In addition, we use our technology to provide text
conversion and Web site hosting services for traditional print publishers,
thereby increasing the online healthcare resources accessible through our
content libraries.
We distribute our content through a network of proprietary and affiliated
Web sites that comprise the HealthGate Network. The HealthGate Network includes
(1) our own Web sites, www.healthgate.com in the United States and
www.healthgate.co.uk in the United Kingdom; (2) customized, co-branded CHOICE
Web sites developed for hospitals and other enterprises; and (3) other third
party Web sites to which we syndicate content. With our extensive online content
libraries and broad distribution network, we believe we are a leading source for
healthcare information on the Internet.
We derive revenue primarily from (1) services and (2) online advertising,
sponsorship and e-commerce.
To date, services revenue has been derived principally from development,
implementation and hosting fees associated with our activePress service and, to
a lesser extent, from syndicating our content to third party Web sites. Revenue
from activePress services and content syndication is recognized ratably over the
terms of the agreements which generally range from one to two years. Beginning
in 1999, we expect to derive increased services revenue through the introduction
of CHOICE Web site development, implementation and hosting.
Advertising and sponsorship revenue includes revenue from banner advertising
and sponsorship of discrete portions of our content libraries. Advertising
revenue is derived principally from short-term advertising contracts in which we
typically guarantee a minimum number of impressions to be delivered to users
over a specified period of time for a fixed fee. Advertising revenue is
recognized in the period in which the advertisement is displayed at the lesser
of the ratio of impressions delivered over total guaranteed impressions or on a
straight line basis over the term of the contract, provided that we do not have
any significant obligations remaining. To the extent that minimum guaranteed
impressions are not met, we defer recognition of the corresponding revenue until
the guaranteed impressions are delivered. We use NetGravity's AdServer software
to track banner advertising impressions and issue a NetGravity Traffic Report
weekly to our advertisers. Our advertising statistics are audited to assure
accuracy by the Audit Bureau of Circulation Interactive, an independent audit
bureau in the advertising industry. Sponsorship revenue is derived principally
from contracts ranging from one to six months. Sponsorships are designed to
support broad marketing objectives, including brand promotion, awareness,
product introductions, online research and the integration of advertising with
editorial
29
<PAGE>
content. Sponsorship revenue is generally recognized ratably over the terms of
the applicable agreements.
Advertising and sponsorship revenue also includes barter revenue, which
represents an exchange by us of advertising space on our own Web sites for
reciprocal advertising space on other Web sites. Revenue from barter
transactions is recognized during the period in which we display the
advertisements. Barter transactions are recorded at the estimated fair value of
the advertisements provided, unless the fair value of the advertising services
received is more evident. Barter expenses are recognized when our advertisements
are run on the reciprocal Web sites, which is typically in the same period
during which the advertisements are run on our own Web sites. Barter expenses
are included in sales and marketing expenses. These barter transactions have no
impact on our cash flows and, typically, no significant impact on our results of
operations. We anticipate that barter revenue will continue to decrease as a
percentage of total revenue in the future as we continue to focus on providing
services in exchange for cash.
E-commerce revenue has been derived principally from individual user online
subscriptions and from transaction fees for fee-based access to portions of our
own Web sites. Revenue from user subscriptions is recognized ratably over the
subscription period, and revenue from transaction-based fees is recognized when
the related service is provided. We expect that transactional fees associated
with our providing full-text journal articles from our activePress clients will
result in increased e-commerce revenue. Additionally, we are exploring other
e-commerce opportunities to offer products and services to our users.
Our business model is still in an emerging stage, and revenue and income
potential from our business is unproven. Our limited operating history makes an
evaluation of our business and our prospects difficult. Investors should not use
our past results as a basis to predict future performance. We have incurred net
losses since inception and had an accumulated deficit of $10,462,000 as of
December 31, 1998. We intend to significantly increase our sales and marketing
efforts and expenditures. We also intend to continue to invest in content
development and licensing and advertising and brand promotion. As a result, we
expect to incur additional losses through 2000, and we can not assure investors
that we will ever achieve significant revenue or profitability or, if either
significant revenue or profitability is achieved, that we will be able to
sustain them. See "Risk Factors--We have a limited operating history" and "Risk
Factors--We have a history of losses and we expect that losses will continue
through at least 2000."
We recorded deferred compensation of $1,980,000 in the three months ended
March 31, 1999, representing the difference between the exercise price of stock
options granted and the fair market value of the underlying common stock at the
date of grant. The difference is recorded as a reduction of stockholders' equity
and is being amortized over the vesting period of the applicable options,
typically three years. Of the total deferred compensation amount, $123,000 had
been amortized as of March 31, 1999. The amortization of deferred compensation
is recorded as an operating expense. We currently expect to amortize the
following remaining amounts of deferred compensation as of March 31, 1999 in the
periods indicated:
<TABLE>
<S> <C>
April 1, 1999--December 31, 1999.................................. $ 497,000
January 1, 2000--December 31, 2000................................ 660,000
January 1, 2001--December 31, 2001................................ 660,000
January 1, 2002--March 31, 2002................................... 40,000
</TABLE>
RESULTS OF OPERATIONS
Through December 31, 1996, we were a development stage company, and the
majority of our activities were related to development of products and services,
exploration of different sales and marketing channels, the build-up of hardware
and software infrastructure to support our healthgate.com Web site and the
establishment of the business, operations and financing of our
30
<PAGE>
company. In 1997, 1998 and the three months ended March 31, 1999, we experienced
growth in our business and introduced new services. Therefore, while comparisons
are drawn below, in many instances meaningful conclusions cannot be drawn from
them.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1999 WITH THE THREE MONTHS ENDED
MARCH 31, 1998
REVENUE
Total revenue was $615,000 for the three months ended March 31, 1999
compared to $626,000 for the three months ended March 31, 1998, a decrease of
$11,000 or 2%. Services revenue for the three months ended March 31, 1999
increased to $469,000 from $350,000 for the three months ended March 31, 1998,
due primarily to an increase in the revenue derived from CHOICE Web site
development, implementation and hosting. Sponsorship, advertising and e-commerce
revenue decreased to $146,000 in the three months ended March 31, 1999 from
$275,000 in the three months ended March 31, 1998, due primarily to a decrease
in barter advertising, which resulted from our continued reduction in emphasis
on barter arrangements and increased focus on providing services in exchange for
cash. In the three months ended March 31, 1999, three customers represented 60%
of total revenue, Blackwell Science (36%), Data General (13%) and WebMD (11%).
In the three months ended March 31, 1998, three customers represented 70% of
total revenue, Blackwell Science (40%), WebMD (19%), and Lycos (11%). To date,
substantially all of our revenue has been denominated in U.S. dollars.
COSTS AND EXPENSES
COST OF REVENUE. Cost of revenue consists primarily of salaries and related
costs for personnel directly involved with providing our Web services, royalties
associated with licensed content, and related equipment and software costs. Cost
of revenue increased 42% to $363,000 in the three months ended March 31, 1999
from $255,000 in the three months ended March 31, 1998, due primarily to higher
royalty expenses for licensed content. We expect that these expenses will
continue to increase in absolute dollars for the foreseeable future as we
continue to make additional investments in content development and licensing.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and related costs associated with the development and
support of our Web-based service offerings. Research and development expenses
increased 226% to $752,000 in the three months ended March 31, 1999 from
$231,000 in the three months ended March 31, 1998, due primarily to salaries and
related costs from the addition of technical and development personnel. We
expect that research and development expenses will continue to increase in
absolute dollars for the foreseeable future as we hire additional personnel and
increase expenditures to support our Web-based service offerings.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions and related costs for sales and marketing personnel, as
well as the cost of advertising, marketing and promotional activities. Sales and
marketing expenses increased 83% to $552,000 in the three months ended March 31,
1999 from $301,000 in the three months ended March 31, 1998. This increase was
primarily due to salaries and related costs associated with newly hired sales
and marketing personnel. We expect that our sales and marketing expenses will
continue to increase in absolute dollars as we hire additional sales and
marketing personnel and increase expenditures for advertising, brand promotion,
public relations and other marketing activities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries and related costs for executive and administrative
personnel, as well as legal, accounting and insurance costs. General and
administrative expenses increased 159% to $409,000 in the three months ended
March 31, 1999 from $158,000 in the three months ended March 31, 1998. This
increase was due primarily to salaries and related costs for newly hired
administrative personnel, higher salaries and
31
<PAGE>
related costs for existing personnel and increased professional service fees. In
addition, we recorded deferred compensation of $1,980,000 in the three months
ended March 31, 1999 and amortized $123,000 of the total deferred compensation
as an expense in the three months ended March 31, 1999. The remaining total
deferred compensation is being amortized over the vesting period of the
individual options. We expect that we will incur additional general and
administrative expenses as we continue to hire additional personnel and incur
incremental costs related to the growth of the business, compliance with public
company obligations, including directors' and officers' liability insurance,
investor relation programs and fees for professional services. Accordingly, we
anticipate that general and administrative expense will continue to increase in
absolute dollars in future periods.
INTEREST EXPENSE, NET
Interest expense, net of interest income, increased to $158,000 in the three
months ended March 31, 1999 from $17,000 in the three months ended March 31,
1998. The increase was due primarily to interest incurred on a $2,000,000
convertible note payable to Blackwell Science and a $2,000,000 subordinated
note, both of which were not outstanding for the entire three months ended March
31, 1998, and an increase in interest expense associated with capital leases.
Interest expense for the three months ended March 31, 1999 also includes debt
discount and issuance cost amortization totaling $24,000 related to the
subordinated note.
INCOME TAXES
We incurred significant losses for all periods from inception through March
31, 1999. As of March 31, 1999, we had a net operating loss carryforward of
approximately $10 million for financial reporting purposes. Certain future
changes in the share ownership of HealthGate, as defined in the Tax Reform Act
of 1996, may restrict the utilization of carryforwards. A valuation allowance
has been recorded for the entire deferred tax asset as a result of uncertainties
regarding the utilization of the asset due to HealthGate's lack of earnings
history.
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 WITH YEAR ENDED DECEMBER 31, 1997
REVENUE
Total revenue was $2,434,000 in 1998 compared to $1,285,000 in 1997, an
increase of $1,149,000 or 89%. Services revenue in 1998 was $1,486,000, which
was comprised primarily of revenue from our activePress arrangement with
Blackwell Science, one of our stockholders, and revenue from content syndication
arrangements. The service arrangement with Blackwell expires in February 2000.
Services revenue in 1997 was not significant. Sponsorship, advertising and
e-commerce revenue decreased to $948,000 in 1998 from $1,196,000 in 1997, due
primarily to a decrease in revenue under barter advertising arrangements to
$436,000 in 1998 from $607,000 in 1997. During 1998, we began to place less
emphasis on barter arrangements and focus more on providing services in exchange
for cash. We anticipate that barter revenue will continue to decrease as a
percentage of total revenue in the future. In 1998, two customers represented
62% of total revenue, Blackwell Science (44%) and WebMD (18%). In 1997, two
customers represented 37% of total revenue, Lycos (19%) and Blackwell Science
(18%).
COSTS AND EXPENSES
COST OF REVENUE. Cost of revenue consists primarily of salaries and related
costs for personnel directly involved with providing our Web services, royalties
associated with licensed content, and related equipment and software costs. Cost
of revenue increased 29% to $1,181,000 in 1998 from $912,000 in 1997. The
increase was primarily attributable to higher royalty expenses for licensed
content.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and related costs associated with the development and
support of our Web-based service offerings. Research and development expenses
increased 63% to $1,450,000 in 1998 from $891,000 in 1997, due primarily
32
<PAGE>
to salaries associated with newly hired development personnel and related
recruiting costs. We anticipate that research and development expenses will
continue to increase as HealthGate develops and enhances its Web-based service
offerings, and hires additional technical and development personnel.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
employee salaries, commissions and related costs, as well as the cost of
advertising, marketing and promotional activities. Sales and marketing expenses
decreased 5% to $1,414,000 in 1998 from $1,496,000 in 1997, due primarily to a
corresponding decrease in expenses under barter advertising arrangements to
$418,000 in 1998 from $617,000 in 1997. The decrease in barter advertising
expenses was the result of our entering fewer barter advertising arrangements in
1998. The decrease in barter advertising expenses was partially offset by
increased salaries and related costs associated with newly hired sales and
marketing staff. We expect that sales and marketing expenses will increase as we
continue to expand our sales, marketing and advertising activities and hire
additional personnel for our sales and marketing force.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries and related costs for executive and administrative
personnel, as well as legal, accounting and insurance costs. General and
administrative expenses increased 78% to $929,000 in 1998 from $521,000 in 1997.
The increase was due primarily to salaries and related costs associated with
newly hired administrative personnel, higher salaries and related costs
attributable to existing personnel and increased fees for professional services.
We expect that general and administrative expenses will continue to grow as we
increase our staffing to support expanded operations and facilities, and incur
expenses related to being a public company.
INTEREST EXPENSE, NET
Interest expense, net of interest income, increased to $327,000 in 1998 from
$6,000 in 1997. The increase was due primarily to interest incurred on a
$2,000,000 convertible note payable to Blackwell Science and a $2,000,000
subordinated note, both issued in 1998, and to an increase in interest expense
associated with capital leases. Interest expense in 1998 includes debt discount
and debt issuance cost amortization totaling $54,000 related to the subordinated
note.
INCOME TAXES
As of December 31, 1998, HealthGate generated a net operating loss
carryforward of $8,492,000. HealthGate's net operating loss carryforwards expire
beginning in 2010. Certain future changes in the share ownership of HealthGate,
as defined in the Tax Reform Act of 1996, may restrict the utilization of
carryforwards. A valuation allowance has been recorded for the entire deferred
tax asset as a result of uncertainties regarding the utilization of the asset
due to HealthGate's lack of earnings history.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 WITH YEAR ENDED DECEMBER 31, 1996
REVENUE
Total revenue was $1,285,000 in 1997 compared to $408,000 in 1996, an
increase of $877,000 or 215%. The increase in total revenue was due primarily to
growth in advertising and sponsorship revenue, and to a lesser extent, an
increase in e-commerce revenue resulting from a higher volume of fee-based
transactions on our Web sites. Included in total revenue is revenue from barter
advertising transactions, which increased to $607,000 in 1997 from $125,000 in
1996. In 1997, two customers represented 37% of total revenue, Lycos (19%) and
Blackwell Science (18%). In 1996, two customers represented 26% of total
revenue, Infoseek (15%) and Lycos (11%); additionally, a single research and
development arrangement represented 21% of total revenue.
COSTS AND EXPENSES
COST OF REVENUE. Cost of revenue increased 85% to $912,000 in 1997 from
$492,000 in 1996. The increase in cost of revenue resulted primarily from
expanding our infrastructure to support increased
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activity on our Web sites, and included higher salary and related costs,
increased royalty costs associated with licensed content and increased costs
related to equipment and software.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased 9% to
$891,000 in 1997 from $980,000 in 1996. The decrease was due primarily to a
reduction in costs associated with outside engineers and consultants, as we
realized cost savings by transitioning most development work to our own
employees. This decrease was partially offset by salaries associated with newly
hired development personnel and related costs.
SALES AND MARKETING. Sales and marketing expenses increased 39% to
$1,496,000 in 1997 from $1,080,000 in 1996. The increase was due primarily to
higher advertising costs, and to salaries and related costs associated with new
staff hired to support our expanded sales and marketing efforts. Barter
advertising expenses included in total sales and marketing expenses increased to
$617,000 in 1997 from $115,000 in 1996, as a result of increased barter
advertising arrangements in 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
8% to $521,000 in 1997 from $568,000 in 1996. This decrease was due primarily to
reduced professional services costs, partially offset by increased salaries and
related costs associated with administrative personnel.
INTEREST EXPENSE, NET
Interest expense, net of interest income, decreased to $6,000 in 1997 from
$14,000 in 1996, due primarily to increased interest income earned on higher
average cash balances invested.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily by the private
placement of debt and equity securities. In the period 1994 through 1997, we
received net proceeds of $5,427,000 from the issuance of several series of
redeemable convertible preferred stock. During 1998, we received net proceeds of
$3,929,000 through the issuance of a $2,000,000 convertible note payable to
Blackwell Science and a $2,000,000 subordinated note with detachable warrants.
The $2,000,000 subordinated note, which we plan to repay with a portion of the
proceeds of this offering, is secured by substantially all of our tangible and
intangible assets. We have generally financed computer and related hardware
needs through equipment lease financing arrangements. As of March 31, 1999, we
had approximately $102,000 of cash and cash equivalents.
In April 1999, we issued 546,028 shares of newly authorized Series E
redeemable convertible preferred stock for gross proceeds of $6,250,000. In
connection with the issuance of the Series E preferred stock, we paid $300,000
of fees and expenses to a placement agent, and issued to the placement agent
warrants to purchase 24,919 shares of our common stock at an exercise price of
$2.51 per share. The placement fee and warrant value will be reflected as a
reduction of the proceeds from the Series E preferred stock issuance. An
additional 174,729 shares of Series E preferred stock were issued upon
conversion of the $2,000,000 convertible note payable to Blackwell Science. The
Series E preferred stock ranks senior in liquidation to the other classes of
preferred stock, and has certain veto rights. The Series E preferred stock
accrues cumulative annual dividends at 7% of its liquidation value (initially
$8,250,000). The dividends are compounded annually and, unless paid, are added
to the Series E preferred stock liquidation value. The Series E preferred stock
is convertible into a number of shares of common stock determined by dividing
the liquidation value by a conversion price per share of $2.51. The conversion
price is to be adjusted for certain dilutive events.
At the time of issuance, each share of Series E preferred stock was
convertible into one share of common stock, which represents a discount from the
fair value of common stock on the date of the Series E issuance. The value
attributable to this conversion right represents an incremental yield, or a
beneficial conversion feature, which will be recognized as a return to the
preferred stockholders. This amount, equal to the proceeds from the Series E
offering, will be reported as accretion of preferred stock to redemption value
in the consolidated statement of operations in the period the Series E
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preferred stock was issued, and represents a non-cash charge in the
determination of net loss attributable to common stockholders.
For the three months ended March 31, 1999, the cash used in operations was
$598,000. Cash used during this period was primarily due to the net loss of
$1,620,000, offset partially by depreciation and amortization of $129,000, a
non-cash compensation expense of $123,000, an increase of $253,000 in accounts
receivable, an increase of $92,000 in prepaid expenses and other current assets,
an increase of $129,000 in other assets, an $617,000 increase in accounts
payable, an increase of $140,000 in accrued expenses and an increase of $493,000
in deferred revenue. For the first quarter of 1998, the cash provided by
operations was $111,000. Cash provided during this period was primarily due to
the net loss of $335,000, offset partially by depreciation and amortization of
$81,000, an increase of $203,000 in accounts receivable, an decrease of $76,000
in prepaid expenses and other current assets, an $120,000 increase in accounts
payable, an increase of $41,000 in accrued expenses and an increase of $90,000
in deferred revenue. Increases in operating assets and liabilities were
primarily due to the growth of business and operations during the first quarters
of 1999 and 1998.
Cash used in operations was $2,484,000 in 1998, $1,757,000 in 1997, and
$2,284,000 in 1996. Cash used during these periods was primarily attributable to
the net losses incurred during these periods of $2,878,000, $2,541,000, and
$2,726,000 respectively, offset in part by depreciation and amortization,
increases in accounts receivable, increases in prepaid expenses and other
current assets, and increases in accounts payable and accrued expenses.
Increases in operating assets and liabilities were primarily the result of the
growth of business and operations during these periods.
Cash used for investing activities consisted primarily of property and
equipment purchases of $197,000 in the three months ended March 31, 1999 and
$74,000 in the three months ended March 31, 1998. We also entered into capital
leases for computer equipment totaling $49,000 and $135,000 for the three months
ended March 31, 1998 and 1999, respectively.
Cash used for investing activities consisted of property and equipment
purchases of $278,000 in 1998, $125,000 in 1997 and $153,000 in 1996. We also
entered into capital leases for computer equipment totaling $577,000 in 1998,
$71,000 in 1997 and $87,000 in 1996.
At March 31, 1999, we had outstanding commitments under capital leases of
$511,000 and under operating leases for equipment and office space of $678,000.
In addition, future minimum payments under content license agreements totaled
$544,000 at March 31, 1999. We expect our commitments under content licensing to
increase as we expand our content libraries.
We currently anticipate that the net proceeds from the offering, together
with our available cash resources, will be sufficient to meet our presently
anticipated working capital, capital expenditure and business expansion
requirements for at least the next 24 months. However, we may need to raise
additional funds within the next 24 months to further expand sales and
marketing, develop new or enhanced products and services, respond to competitive
pressures, acquire or invest in complementary businesses or take advantage of
unanticipated opportunities. Our future capital needs will depend upon numerous
factors, including the success of our existing and new product and service
offerings and competing technological and market developments. We may be
required to raise additional funds through public or private financing,
strategic relationships or other arrangements. We can not guarantee that
additional funding, if needed, will be available on terms acceptable to us, or
at all.
YEAR 2000 COMPLIANCE READINESS DISCLOSURE
IMPACT OF THE YEAR 2000
Many currently installed computer systems and software products are unable
to distinguish between twentieth century dates and twenty-first century dates.
As a result, many companies' software and computer systems may need to be
upgraded or replaced to comply with these Year 2000 requirements. Our business
is dependent on the operation of numerous systems that could potentially be
impacted by Year 2000 related problems. Those systems include, among others:
hardware and
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software systems used by us to deliver services to our customers, including our
proprietary software systems as well as hardware and software supplied by third
parties; communications networks, such as the Internet and private intranets,
which we depend on to provide content to our customers; internal systems of our
customers and suppliers; hardware and software we use internally to manage our
business; and non-information technology systems and services we use in our
business such as the telecommunications and building systems.
STATE OF READINESS
COSTS. To date, we have not incurred material costs in identifying or
evaluating Year 2000 compliance issues, although consideration of the Year 2000
question is an integral part of all our on-going developmental and operational
reviews. Most of our expenses to date have related to and are expected to
continue to relate to the operating costs associated with time spent by
employees in the evaluation process and Year 2000 compliance testing generally.
We presently anticipate that future expenditures will be less than $200,000. As
a young company, we purchased or developed new hardware and software at a time
when our suppliers and developers were sensitive to issues surrounding the Year
2000 problem.
RISKS. We have made preliminary assessments of our Year 2000 readiness with
emphasis on our operating and administrative systems and the proprietary
software systems and third party software and hardware we use to deliver
services to our customers and users. Our assessment plans have consisted of
internal testing of our systems, contacting third party vendors of hardware,
software and services to us and to our users, assessing and implementing repairs
or replacements as required and developing contingency plans in the event of
Year 2000 problems arising as the year ends. We plan to have completed our
assessments and remediation plans and to have made any necessary changes to our
internal systems and proprietary software by the end of June 1999. HealthGate
has contacted its major vendors for software, hardware and related services.
These vendors have indicated that they are Year 2000 compliant. HealthGate is
not anticipating any problems at the present time. We are not currently aware of
any internal Year 2000 compliance problems that could reasonably be expected to
have a material adverse effect on our business, results of operations and
financial condition, without taking into account our efforts to avoid or fix
such problems. However, we can not guarantee that we have identified or will
identify all Year 2000 compliance problems in our infrastructure that may
require substantial revisions and fixes. Also, despite our testing and reviews,
we may experience Year 2000 problems related to the third party software,
hardware or other systems on which we are reliant, and any of these problems may
be time consuming or expensive to fix. We have given a warranty in our
activePress agreement with Blackwell Science that our applications and services
are Year 2000 compliant. If our applications and services fail to be Year 2000
compliant, this agreement could be terminated or we could be liable for damages,
either of which could have a material adverse effect on our business. In
addition, the purchasing patterns of customers or potential customers may be
affected by Year 2000 questions, and any significant delays in making purchasing
decisions could either directly or indirectly affect us.
In addition, we cannot be assured that the governmental agencies, utility
companies, Internet access companies, third party providers and others outside
our control will be Year 2000 compliant. The failure by these entities to be
Year 2000 compliant could result in a systemic failure beyond our control. We
believe that the most reasonably likely worst case scenario would result in a
prolonged Internet, telecommunications or electrical failure which would affect
our ability to meet our commitments to our customers or prevent our users from
accessing our Web sites or services, either of which, in turn, could have a
material adverse effect on our business, results of operations and financial
condition.
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CONTINGENCY PLAN
We have been engaged in an ongoing assessment of our readiness and have
developed preliminary contingency plans. The results of our analyses and the
responses received from third party vendors and service providers will be taken
into account to revise our contingency plans as necessary. It is our goal to
finalize our contingency plans by the end of the second calendar quarter of
1999.
RECENT ACCOUNTING PRONOUNCEMENTS
We adopted Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income," effective January 1, 1998. This statement
requires a full set of general purpose financial statements to be expanded to
include the reporting of "comprehensive income." Comprehensive income is
comprised of two components, net income and other comprehensive income. During
the years ended December 31, 1996, 1997 and 1998, we had no items qualifying as
other comprehensive income; accordingly, the adoption of SFAS No. 130 had no
impact on our financial statements.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
which supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." This statement changes the way public business enterprises report
segment information, including financial and descriptive information about their
selected segment information in interim and annual financial statements. Under
SFAS No. 131, operating segments are defined as revenue-producing components of
the enterprise which are generally used internally for evaluating segment
performance. SFAS No. 131 is effective for our fiscal year ended December 31,
1998 and had no effect on our financial position or results of operations. We
operate in one segment, which is providing healthcare and related information to
institutions and individuals through the Internet.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. HealthGate does
not expect SFAS No. 133 to have a material effect on its financial position or
results of operations.
In February 1998, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position (SoP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SoP 98-1 establishes the
accounting for costs of software products developed or purchased for internal
use, including when such costs should be capitalized. SoP 98-1 will be effective
for HealthGate beginning in fiscal 1999, and HealthGate does not expect adoption
of this SoP to have a material effect on its financial position or results of
operations.
In April 1998, the AcSEC issued SoP 98-5, "Reporting on the Costs of
Start-Up Activities." Start-up activities are defined broadly as those one-time
activities related to the opening of a new facility, introducing a new product
or service, conducting business in a new territory, conducting business with a
new class of customer, commencing some new operation or organizing a new entity.
SoP 98-5 requires that the cost of start-up activities be expensed as incurred.
SoP 98-5 is effective for HealthGate beginning in fiscal 1999, and HealthGate
does not expect adoption of this SoP to have a material effect on its financial
position or results of operations.
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BUSINESS
OVERVIEW
HealthGate is a leading Internet provider of reliable, objective,
comprehensive and up-to-date healthcare information helping physicians and other
healthcare professionals, patients and health-conscious consumers make better
informed healthcare decisions. We have aggregated and developed what we believe
are the most extensive health and medical libraries of any online provider,
currently totaling approximately 27 million different pages of health and
medical information from over 190 sources. This content includes internationally
recognized journals, authoritative government sources and extensive
bibliographic databases representing 27 independent content providers. We adapt
and integrate this diverse content through our internally developed software
programs, which include our proprietary ReADER-Registered Trademark- natural
language searching software, designed to facilitate the search and retrieval of
relevant information in response to each user's search.
Given the depth and breadth of our content, we provide healthcare
information to a wide range of online users, including physicians and other
healthcare professionals, patients and health-conscious consumers. Our online
library targeted to physicians and other healthcare professionals includes
internationally recognized journals such as the NEW ENGLAND JOURNAL OF MEDICINE,
bibliographic databases such as MEDLINE, handbooks such as the Drug Information
Handbook, decision support materials such as the Poisoning and Toxicology
Compendium and Continuing Medical Education programs from the Boston University
School of Medicine and Professional Postgraduate Services. Our patient focused
online library includes patient education materials such as a series of over
3,000 patient education brochures published by the Clinical Reference Systems
division of Access Health. We have also created a proprietary series of industry
recognized consumer health Webzines and have developed Wellness Centers, which
are compilations of information we produce for consumers on 100 of the most
prevalent illnesses, diseases and medical conditions. In addition, we use our
technology to provide text conversion and Web site hosting services for
traditional print publishers, thereby increasing the number of online healthcare
resources accessible through our content libraries. While we aggregate and
develop content with the goal of meeting the specific needs of professionals,
patients and health-conscious consumers, we do not restrict access to the target
audience, for instance, giving patients and consumers access to more in-depth
information like leading medical journals written for medical professionals.
We distribute this content through a network of proprietary and affiliated
Web sites that comprise the HealthGate Network. The HealthGate Network includes
(1) our own Web sites, www.healthgate.com in the United States and
www.healthgate.co.uk in the United Kingdom; (2) customized co-branded CHOICE-TM-
Web sites developed for hospitals and other enterprises which carry both
HealthGate's and the enterprise customer's names; and (3) other third party Web
sites to which we syndicate content under license agreements. With our extensive
online content libraries and distribution network, we believe we are a leading
source for healthcare information on the Internet. In March 1999, our users
viewed approximately 3.76 million content pages on our own Web sites.
We generate revenue from the following activities:
(1) developing co-branded CHOICE Web sites for enterprise clients and
distributing content through these CHOICE Web sites;
(2) offering banner advertising and sponsorship of discrete portions of
our content libraries to pharmaceutical companies, other healthcare
advertisers and other businesses and organizations;
(3) providing our activePress-TM- Web publishing services to traditional
print publishers;
(4) syndicating content to third party Web sites; and
(5) participating in e-commerce opportunities.
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INDUSTRY BACKGROUND
During the past decade, the Internet has emerged as a significant global
communications medium and an effective alternative to many forms of traditional
media. The Internet enables consumers to instantly retrieve information,
communicate with others and engage in e-commerce. As a result, Internet use is
growing rapidly. According to Jupiter Communications, an industry research firm,
the number of Internet users in the United States is expected to grow from
approximately 63 million in 1998 to approximately 116 million by 2002.
The rapid growth of the Internet as a tool for communication, entertainment
and e-commerce has resulted in a proliferation of Web sites dealing with myriad
topics, products and services. Web sites such as America Online and Yahoo!
developed in response to Internet users' need for a simple means of navigating
the Internet. As the number of Internet users has increased, discrete user
groups have developed that share the same interests, such as searchers of health
and medical information, world and national news headlines and personal
investment information. These groups have, in turn, created a demand for more
focused subject specific Web sites. These subject specific Web sites are a
growing segment of the Internet. Among the most popular topics of these types of
Web sites is healthcare. According to Cyber Dialogue, Inc., an industry research
firm, during the 12-month period ended July 1998, approximately 17 million
adults in the United States searched online for health and medical information,
a number which Cyber Dialogue estimates will grow to approximately 33 million in
2000. Further, Cyber Dialogue research indicates that 70% of adults who seek
health and medical information online believe that the availability of this
information on the Internet enables them to make better informed healthcare
choices.
This demand for online healthcare content is creating many opportunities for
businesses to reach new consumers and expand their relationships with existing
customers. According to Cyber Dialogue, people that use the Internet to retrieve
online medical information are an attractive audience to businesses, because
these individuals are typically older and more affluent than the general online
population. The Internet, unlike traditional media sources, allows businesses to
effectively target these consumers in an interactive manner. Through banner ads
and sponsorships, businesses are able to dynamically market their goods and
services in an efficient manner. According to Jupiter Communications, online
health and medical advertising in the U.S. is expected to grow from $12.3
million in 1998 to $265.1 million in 2002. In addition to providing a new
marketing medium, the Internet has become a new distribution channel for
businesses, through which they can sell products to consumers.
We believe that the company that establishes a clear brand identity as a
reliable source of comprehensive online healthcare information and services will
have a significant opportunity to capture a leading share of the online health
audience as this industry continues to grow.
BUSINESS STRATEGY
Our objective is to capture a leading share of the online health audience as
this industry continues to grow. We plan to achieve this objective by delivering
a broad array of healthcare content and related services to healthcare
professionals, patients and consumers through the HealthGate Network. Our
strategy includes the following key elements:
PROVIDE LEADING HEALTHCARE CONTENT AND TECHNOLOGY. We seek to continually
expand our health and medical content libraries to enable healthcare
professionals, patients and consumers to easily satisfy their health-related
information needs without leaving the HealthGate Network. We are currently
focusing on expanding our content in the areas of prescription and over the
counter drugs, mental health, toxicology, decision support, alternative health,
geriatrics and continuing education. In addition to continually expanding our
content, we intend to continue integrating content with technology in order to
enhance the online user experience. We are currently pursuing technology
initiatives designed
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to provide enhanced alert services, more sophisticated database searching
capabilities and personalization and content customization for the individual
users. Given the diversity of health-related Web sites, and the varying degrees
of quality and amount of information available on these Web sites, we believe
professionals, patients and consumers have a desire to be able to access
reliable, objective, comprehensive and up-to-date information on specific topics
in a user-friendly manner. We plan to continue to lead the way in making this
information accessible to both healthcare professionals and lay people.
EXPAND THE HEALTHGATE NETWORK. The HealthGate Network consists of (1) our
own Web sites, www.healthgate.com and www.healthgate.co.uk; (2) clients'
co-branded CHOICE Web sites; and (3) other third party Web sites including
Inteli-Health and WebMD, which carry our syndicated content under individual
license agreements. We plan to increase the number of CHOICE Web sites on the
HealthGate Network through expanded marketing efforts, using both our in-house
sales force and value added resellers, such as Data General Corporation, which
resells our products and services together with their complimentary products and
services. We intend to further expand the HealthGate Network by continuing to
syndicate portions of our content libraries to other health-related Web sites.
By expanding the HealthGate Network, we believe we will be able to continue to
increase user traffic, thereby enabling us to generate increased revenue from
advertising, sponsorships and e-commerce opportunities.
CONTINUE TO BUILD THE HEALTHGATE BRAND. We believe that increased awareness
of the HealthGate brand will be important to our ability to continue to build
our user base and to attract additional customers, advertisers, sponsors and
strategic affiliates. We plan to allocate significant resources to continue to
build brand recognition by expanding the reach of the HealthGate Network. By
continuing to increase the number of co-branded CHOICE Web sites, we plan to
cost-effectively attract new users and build online communities, linked groups
of users with similar health related interests, by leveraging the name
recognition of local enterprises, including hospitals and other healthcare
organizations, corporations and academic institutions. We build brand awareness
on our www.healthgate.com and www.healthgate.co.uk Web sites by offering users
free access to a portion of our content libraries. Moreover, we will continue to
syndicate content under license agreements that require licensees to display our
name prominently on the syndicated content pages. These agreements also require
these licensees to enable users to reach our www.healthgate.com Web site from
the licensees' sites by clicking on a HealthGate link. In addition, we plan to
build recognition of the HealthGate brand through online and traditional media
advertising, other promotional activities and marketing initiatives, and through
additional strategic affiliations.
BROADEN THE RANGE OF PRODUCTS AND SERVICES. We believe that broadening the
variety of products and services offered through the HealthGate Network will
allow us to better serve existing users, attract new users and keep our users on
the HealthGate Network for longer periods per visit. We intend to enhance our
offering of products and services to provide physician counseling services,
clinical trial recruitment and an integrated platform for linking clinical
information and patient education materials with electronic medical records. We
plan to leverage the HealthGate Network, including our enterprise-based CHOICE
accounts, to market these new, predominantly fee-based products and services. We
believe that these products and services will also make the HealthGate Network
even more attractive to potential advertisers and sponsors seeking a targeted
audience. Additionally, we are pursuing e-commerce partners to further leverage
revenue opportunities from the HealthGate Network user base.
PURSUE ACQUISITIONS AND ADDITIONAL STRATEGIC AFFILIATIONS. We intend to
pursue an acquisition and affiliation strategy focusing on proprietary content
and complementary technologies and services. Acquiring providers of proprietary
content will allow us to customize acquired content to better meet the needs of
our users and clients, as well as allow us to increase our user base. We also
plan to
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continue to pursue additional strategic affiliations with content providers to
expand our libraries, similar to our activePress content affiliations with
Blackwell Science and the NEW ENGLAND JOURNAL OF MEDICINE. In addition, we
intend to pursue exclusive strategic affiliations with content providers to
produce additional unique content, similar to our plan to produce a consumer
version of the NEW ENGLAND JOURNAL OF MEDICINE with the Massachusetts Medical
Society. We also plan to pursue strategic affiliations with companies that offer
complementary technologies and services, such as Web site design and development
firms, electronic medical records providers and online prescription information
and transaction service companies.
CONTINUE TO GROW INTERNATIONALLY. Interest in obtaining reliable healthcare
information is universal. We believe that a significant opportunity exists to
establish HealthGate as the premier supplier of healthcare information over the
Internet in markets outside the United States. Building upon the expertise
gained from the May 1998 launch of our www.healthgate.co.uk Web site, which was
specifically developed for United Kingdom users, we intend to establish
additional HealthGate country specific Web sites. Our strategy includes
licensing and creating content of specific interest to a particular country's
users, in addition to providing internationally recognized English language
sources of medical information, such as MEDLINE and customizing and translating
the user interface into the local language. In addition, we plan to continue
syndicating portions of our content libraries to online providers in foreign
markets. For example, we have established relationships with online providers in
Italy and Australia who are providing co-branded HealthGate syndicated content
as part of their product offerings.
HEALTHGATE CONTENT
We believe we offer professionals, patients and consumers one of the most
reliable, objective, comprehensive and up-to-date collections of health and
medical information available on the Internet, with presently over 27 million
different pages of healthcare information from over 190 sources. Our content
libraries are updated regularly with the latest available health and medical
information, on a daily, weekly or monthly basis, or as appropriate. We segment
our content libraries into appropriate collections to facilitate access for
professionals, patients and consumers. However, content from any collection is
available to any type of user under a variety of pricing structures. For
example, a patient who might typically access one of our free Healthy Living
Webzines for general information about a particular medical condition, illness
or disease is also able to access relevant articles in the
professionally-oriented NEW ENGLAND JOURNAL OF MEDICINE for a one time
transaction fee in order to explore the most recent and authoritative scientific
studies of that condition, illness or disease.
Generally, certain licensed content, including MEDLINE, CANCERLIT and
AIDSLINE, is free to users throughout the HealthGate Network. Other licensed
content, including PsycINFO, Well Connected and the EMBASE Cardiology
Consultant, is accessible for a fee on a transaction specific basis or through
subscription plans. In order to meet the needs of their communities of users,
CHOICE Web site clients and licensees of our syndicated content pay us to make
selected portions of our libraries available to their users.
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We compile our online libraries in three ways: (1) licensing content from
healthcare and medical information providers; (2) developing proprietary
in-house content; and (3) licensing content from our activePress publishing
clients in conjunction with providing these clients with Web site development
and hosting services. These categories of content are described in the following
table:
<TABLE>
<CAPTION>
CONTENT PROVIDER DESCRIPTION REPRESENTATIVE SOURCES DISTRIBUTION CHANNELS
<S> <C> <C> <C>
Independent Well known, - MEDLINE (National - healthgate.com
Licensors authoritative content Library of Medicine) - CHOICE Web sites
sources licensed from - Adult Health Advisor - Syndicated third
government agencies, (Clinical Reference party Web sites
professional Systems) - healthgate.co.uk
associations, not-for- - Continuing Medical
profit organizations, Education
medical centers, (Professional
publishers and other Postgraduate
third parties. Services, a division
of Physicians World
Communications Group)
- Reuters Medical News
(Reuters Health)
- EMBASE Cardiology
Consultant (Elsevier
Science B.V.)
HealthGate Nine different award - Healthy Athlete - healthgate.com
winning magazines - Healthy Eating - CHOICE Web sites
developed by HealthGate - Healthy Man - Syndicated third
specifically for - Healthy Mind party Web sites
Web-based distribution. - Healthy Parenting - healthgate.co.uk
Updated weekly with new - Healthy Sexuality
articles, written or - Healthy Traveler
purchased by - Healthy Woman
HealthGate. - RxAlert
activePress Full-text journals and - NEW ENGLAND JOURNAL - nejm.org
Clients similar content from OF MEDICINE - blackwell-synergy.com
traditional print (Massachusetts - healthgate.com
publishers, converted Medical Society) - CHOICE Web sites
for Web access and - Blackwell Science - Syndicated third
hosted by HealthGate's journals party Web sites
activePress unit for a (Blackwell Science) - healthgate.co.uk
fee.
</TABLE>
LICENSED CONTENT
This category includes well known, independent and authoritative health and
medical content licensed by us for distribution via the HealthGate Network. This
content is typically peer-reviewed and many of our licensed content sources are
recognized by healthcare professionals and academia for their
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high quality. Content in this category includes the following types of
information and representative sources:
- bibliographic databases, such as MEDLINE, produced by the National Library
of Medicine; CANCERLIT, produced by the National Cancer Institute; and
EMBASE Drugs and Pharmacology, produced by Elsevier Science B.V.;
- patient education and consumer health materials, such as the Merriam
Webster Medical Dictionary, the Advisor Series of over 3,000 informational
brochures from Clinical Reference Systems and compilations of information
that we prepare on 100 of the most prevalent medical conditions, illnesses
and diseases and make available through our Wellness Centers;
- Continuing Medical Education programs, such as those produced by the
Boston University School of Medicine;
- decision support materials, such as the Poisoning and Toxicology
Compendium published by Lexi-Comp, Inc.; and
- newsfeeds, such as Reuters Medical News and the Los Angeles Times
Syndicate.
All licensed content must meet certain criteria prior to being added to our
content libraries. The criteria used to evaluate the content include the content
provider's own review process, comparison with comparable sources and the
frequency of updates.
HEALTHGATE PROPRIETARY CONTENT
This category currently includes nine Web-based consumer health magazines we
produce called Healthy Living. The Webzines in the Healthy Living series cover
subjects such as men's health, women's health, parenting, nutrition, travel
medicine, sexuality, sports medicine, mental health and prescription and
over-the-counter drugs. Articles for these publications are written by medical
writers, physicians, dentists, dieticians and nurses exclusively for us. These
articles discuss current health trends, newly published research findings,
health-related lifestyle issues and late breaking topics recommended by the
Healthy Living Editorial Board. This Editorial Board is comprised of five
physicians affiliated with institutions including the Harvard University School
of Medicine, Boston University School of Medicine, Massachusetts General
Hospital and Dana Farber Cancer Institute. In order to assure accurate and high
quality content, all articles are reviewed prior to publication by medical
editors and by our Editorial Board. Several Healthy Living Webzines have been
recognized for their quality by the American Medical Writers Association, Tufts
University School of Nutrition, Lycos and the Disney Go Network.
ACTIVEPRESS CONTENT
This category currently includes all medical, scientific and technical
journals published by the worldwide publishing units of Blackwell Science and
the Massachusetts Medical Society, publisher of the NEW ENGLAND JOURNAL OF
MEDICINE. Through our activePress service, we convert these journals for
delivery through the Internet and provide access to the converted journals by
hosting these publishers' Web sites. In addition to being paid a fee for our
activePress development, implementation and hosting services, we receive the
right to distribute these journals through our www.healthgate.com and
www.healthgate.co.uk Web sites. We are also able to distribute the Blackwell
Science journals throughout the rest of the HealthGate Network and to distribute
the NEW ENGLAND JOURNAL through our CHOICE Web sites.
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STRATEGIC AFFILIATIONS
We believe that strategic affiliations enable us to acquire content more
rapidly, develop and distribute our products and services, generate traffic on
our own Web sites and CHOICE Web sites, enhance the HealthGate brand and
capitalize on additional revenue opportunities. We have entered into strategic
affiliations for healthcare content, related products and services, marketing
and online distribution with the following companies:
ACTIVEPRESS CONTENT AFFILIATIONS
BLACKWELL SCIENCE, LTD. Through our activePress service, we are the
exclusive developer on the Web of a collection of 200 full text journals for
Blackwell Science. Blackwell Science is the largest publisher of medical
societies' journals and one of the world's largest medical publishers. We have
converted and currently offer online 66 different peer reviewed journal titles
from Blackwell Science's worldwide publishing units, and we have contracted to
convert the remaining 134 Blackwell Science titles and we expect to do so as the
publisher makes them available to us from time to time during the initial term
of the agreement. As part of this service, we link these journals with the
MEDLINE bibliographic database and make them available to Blackwell Science's
individual and institutional subscribers through the www.blackwell-synergy.com
Web site, developed and hosted by us. Our hosting services include storing,
maintaining and updating all converted journals on our computer system,
providing links between these journals and other relevant databases, providing
secure transaction processing through the Web site and managing advertising and
sponsorship for the Web site. In addition to the revenue derived from the
development and hosting of the www.blackwell-synergy.com Web site, we receive a
fee for each online subscriber to a Blackwell journal and a transactional fee
for each Blackwell journal article purchased through the HealthGate Network. We
have the right to syndicate these journals throughout the HealthGate Network and
allocate revenue from syndication with Blackwell Science. The initial term of
our activePress agreement with Blackwell Science runs through February 2000.
Until September 30, 1999, Blackwell Science has the right to extend the term of
the agreement to February 28, 2001. If this right is exercised, Blackwell
Science may renew the agreement annually for an additional three years.
NEW ENGLAND JOURNAL OF MEDICINE. We recently entered into an agreement with
the Massachusetts Medical Society, publisher of the NEW ENGLAND JOURNAL OF
MEDICINE, the most cited publication in medicine, to be the exclusive developer
and host of an enhanced Web site for the JOURNAL using our activePress service.
Through this enhanced Web site, developed using our activePress service, the
JOURNAL will offer electronic subscriptions and be able to provide individual
article delivery and links to the MEDLINE bibliographic database, thereby
improving reader access to this important resource. As part of this agreement,
when this enhanced Web site is re-launched, we will have the right to distribute
the JOURNAL through our own Web sites, through CHOICE Web sites, and, with the
prior approval of the publisher, through syndication to third party Web sites.
In addition to the revenue derived from the development and hosting of this Web
site, we receive a fee for each online subscriber to the JOURNAL and a
transactional fee for each JOURNAL article purchased by a non-subscriber. The
initial term of our activePress agreement with the Massachusetts Medical Society
runs through April 2001 and is renewable annually by mutual agreement.
OTHER CONTENT AFFILIATION
CONSUMER VERSION OF THE NEW ENGLAND JOURNAL OF MEDICINE. We have signed a
term sheet with the Massachusetts Medical Society to create a Web-based consumer
version of the NEW ENGLAND JOURNAL OF MEDICINE. The term sheet is not a
definitive agreement and the parties are presently negotiating a definitive
agreement. If a definitive agreement is reached we will be the exclusive
distributor of this unique version of the JOURNAL. We will pay an annual fee for
the Society to re-write all original articles appearing each week in the JOURNAL
in common, non-technical language. We, in turn, plan to use our
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technology platform to adapt and integrate this content and to link it to
MEDLINE, to drug databases, to other content sources and to relevant sites on
the Web. We intend to make the publication available through subscription. We
plan to sell both targeted advertising and sponsorship on these pages. We expect
to release the consumer version of the NEW ENGLAND JOURNAL OF MEDICINE during
1999.
PRODUCT AND SERVICE AFFILIATIONS
PHYSICIANS WORLD COMMUNICATIONS GROUP. We have a strategic affiliation with
Physicians World Communications Group, an independent medical education company
in the United States. Professional Postgraduate Services, a division of
Physicians World, is accredited by the Accreditation Council for Continuing
Medical Education to offer Category 1 Continuing Medical Education (CME) credit.
Physicians World pays us to format original CME programs for the Web to enhance
the ease of use and quality of the educational experience by adding
interactivity, graphics and audio and video components. We share the revenue
with Physicians World generated from physicians purchasing these programs
through the HealthGate Network. We are implementing a strategic plan with
Physicians World to increase sponsorship funding for the development of new
courses to be provided through this relationship. We are Physicians World's
exclusive development and distribution partner for CME programs over the Web.
Under our agreement with Physicians World, we have agreed, with the exception of
CME programs developed by Boston University School of Medicine, to develop CME
programs for Web distribution only in conjunction with Physicians World.
BOSTON UNIVERSITY SCHOOL OF MEDICINE. We have a strategic affiliation with
Boston University School of Medicine to distribute Continuing Medical Education
programs developed by the School of Medicine through our own Web sites, through
our CHOICE Web sites and through licensees of our syndicated content. Boston
University is accredited by the Accreditation Council for Continuing Medical
Education to offer Category 1 CME credit. We include 23 different CME programs
from Boston University in content libraries selected by our CHOICE Web sites. We
plan to develop additional programs with Boston University through this
relationship.
Physicians take CME courses in order to: (1) comply with state licensure
requirements; (2) qualify for lower insurance premiums; and (3) fulfill
membership requirements of professional associations. Generally, Category 1 CME
courses are considered by most physicians to be more valuable than other types
of CME courses. Approximately 20 hours of Category 1 credit is required annually
by most states for physician re-licensure.
MARKETING AFFILIATION
DATA GENERAL CORPORATION. We have formed a strategic marketing affiliation
with Data General Corporation, an information technology products and services
company. Data General has a current customer base of approximately 1,200
hospitals and healthcare institutions and a sales and marketing group dedicated
to healthcare. Data General's healthcare customer base presents an attractive
target market for our CHOICE Web sites. As a value added reseller, Data General
will offer our co-branded CHOICE product to complement the suite of products and
services that it currently offers to its customers, which products and services
include electronic medical records services, imaging and archival software and
Web-authoring tools. Data General will distribute our CHOICE product to its
customers by purchasing it from us and then reselling it to specific enterprises
based on a CHOICE license agreement entered into between HealthGate and the
specific enterprise. Data General has agreed that, during the term of the
agreement, it will not market any other products or services that are similar to
our CHOICE Web site product. Until June 30, 1999, or for an additional six month
period if Data General has sold at least 25 CHOICE accounts to its customers, we
are not permitted to market directly to Data General's current customer base.
The initial term of our reseller agreement with Data General runs through June
2001 and is renewable for one additional year by mutual agreement.
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DISTRIBUTION AFFILIATIONS
We have formed strategic distribution affiliations with five high-traffic,
health-related Web sites to distribute portions of our content libraries through
licensing agreements. Our present distribution affiliations are with WebMD,
Inteli-health, America's Health Network, the American Medical Association and
MedCast. In addition to providing licensing fees to us, these agreements, in
most cases, provide for sharing advertising and sponsorship revenue generated
through these third party Web sites. Through licensed syndication, we are able
to leverage the user bases of these HealthGate Network Web sites to drive
additional traffic to our content libraries in order to further increase
awareness of the HealthGate brand and develop additional advertising and
sponsorship and e-commerce revenue opportunities. Our name, embedded with a link
to our www.healthgate.com Web site, is displayed on each page viewed by the user
accessing our syndicated content through third party Web sites.
HEALTHGATE'S PRODUCTS AND SERVICES
We have established four distinct product and service offerings: (1) our own
Web sites; (2) CHOICE Web sites; (3) content syndication; and (4) activePress
services. The target groups for these products and services cover a broad
spectrum of customers and users, providing multiple revenue sources, as
summarized in the following chart.
<TABLE>
<CAPTION>
TARGET CUSTOMER AND USER
PRODUCTS AND SERVICES GROUPS REVENUE SOURCES
<S> <C> <C>
www.healthgate.com Individuals - Advertising and sponsorship
www.healthgate.co.uk - Professionals - E-commerce
- Patients
- Consumers
CHOICE Web sites Enterprises - Services
- Hospitals - Annual hosting fees
- Healthcare institutions - Development fees
- Integrated Delivery - Licensing fees
Networks - Advertising and sponsorship
- Businesses - E-commerce
- Colleges and universities
Content Syndication Third party health - Services
information Web sites - Annual hosting fees
- WebMD - Development fees
- Inteli-Health - Licensing fees
- America's Health Network - Advertising and sponsorship
- American Medical - E-commerce
Association
- MedCast
activePress service Publishers - Services
- Blackwell Science - Annual hosting fees
- Massachusetts Medical - Development fees
Society - E-commerce
</TABLE>
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THE WWW.HEALTHGATE.COM AND WWW.HEALTHGATE.CO.UK WEB SITES
We provide healthcare information, products and services through our own Web
sites, www.healthgate.com in the United States and www.healthgate.co.uk in the
United Kingdom. The healthgate.com Web site, targeted to a wide range of users,
was the first to provide free Web access to the complete MEDLINE database. This
site provides a range of medical information, from basic background information
on general health matters, wellness, illnesses and diseases, to in-depth
scientific research on specific medical conditions, from a variety of licensed
and proprietary content sources. The content available on this site is divided
into collections targeted to professionals, patients or consumers. However,
content from all collections is available to any type of user. For example, a
patient can access an article on a specific medical condition in the
professionally oriented NEW ENGLAND JOURNAL OF MEDICINE. Content sources include
patient education and wellness information, bibliographic databases, Continuing
Medical Education programs and decision support materials. Presently, our
consumer information is accessible through www.healthgate.com and
www.bewell.com, our companion consumer Web site. We plan to combine our
bewell.com Web site with our www.healthgate.com by the end of 1999.
The healthgate.co.uk site, launched in May 1998, is our first
country-specific Web site. In addition to internationally recognized sources of
medical information, such as MEDLINE, this site provides access to content of
specific interest to users in the United Kingdom. We use our existing technology
platform to provide easy access to the information on this site. We also use our
technology platform to conform our content to local cultural and language
nuances.
Users may access portions of our content libraries on our own Web sites for
free. Other licensed content, such as PsycINFO, CINAHL, the EMBASE Cardiology
Consultant, and articles from the journals we make available, are available for
a fee on a transaction specific basis.
CO-BRANDED CHOICE WEB SITES FOR ENTERPRISE CLIENTS
Our CHOICE Web sites are customized, co-branded Web sites that provide
enterprises the ability to offer online healthcare information to their
communities of users as part of the HealthGate Network. We market CHOICE Web
sites to the following types of enterprises:
- HEALTHCARE INSTITUTIONS--Healthcare Institutions include hospitals,
managed care organizations and physician groups. These institutions may
wish to provide online healthcare information to their staff and patients
and better market their services to the local community.
- INTEGRATED DELIVERY NETWORKS--Integrated Delivery Networks are networks of
hospitals and clinics. Integrated Delivery Networks can utilize CHOICE Web
sites as part of their suite of services to achieve better brand
recognition while still maintaining the personalized level of service from
each individual component in their network.
- CORPORATE ENTITIES--Our CHOICE Web sites enable any business to provide
its employees health and wellness information through corporate intranets
and extranets. By providing information for health and wellness programs,
businesses may be able to lower their direct healthcare costs, reduce sick
days and increase worker productivity.
- COLLEGES AND UNIVERSITIES--Students, faculty and staff can use our CHOICE
Web sites to access information needed for research papers, theses,
dissertations and for information concerning their own health.
CHOICE Web site clients pay us to provide portions of our content libraries
which they select to offer to their users through the co-branded sites we
develop and host for them.
We create a customized Web site to provide healthcare information from our
content libraries which is tailored to the needs of the specific enterprise's
users. We have developed a number of
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templates for CHOICE Web site design from which each enterprise client may
select a customized combination of health information and related services from
the range of content libraries and services we provide. Because we use a
standard format for our content and have developed flexible Web site templates,
we are generally able to bring CHOICE Web sites online within 10 to 15 business
days of signing an agreement with a CHOICE client.
We have designed our CHOICE offerings with separate modules so that
enterprise clients can choose to have all or individual segments of our content
libraries available through their own CHOICE Web site. The three basic modules
divide our content libraries into: (1) a professional series, which offers
clinically oriented content such as MEDLINE; (2) a patient series, which
includes 3,000 different condition-specific informational brochures; and (3) a
consumer series, featuring general introductory magazine articles from our
Healthy Living Webzines.
We are continually developing additional product and service modules for our
CHOICE clients. For example, we recently added the following new module options:
- PRINTING MODULE FOR PATIENT BROCHURES. Allows printing of customized
patient information brochures using content from our content libraries
with a signature look and feel unique to the specific CHOICE customer,
using customized headers and footers, including organization name, logo,
physician name, contact information and other appropriate information.
- RESOURCE LOCATOR MODULE, WITH CONTENT SENSITIVE LINKS. Allows information
retrieval on any of the hospital's physicians, facilities, special
services or programs, using the hospital's or independent information
databases, such as OneSource, a database of physicians.
In addition, CHOICE clients can choose to participate in advertising and
sponsorship opportunities for their Web sites. The revenue from these
opportunities is allocated between the CHOICE client and us.
As of March 31, 1999, we have established 14 co-branded CHOICE Web sites
providing health information to 37 local hospitals, including Swedish Medical
Center (Seattle, Washington), St. Joseph's Hospital, a unit of Carondelet Health
Systems (Kansas City, Missouri) and Hallmark Health (Malden, Massachusetts) and
two universities. We intend to market our CHOICE Web site product to additional
target enterprise clients including Integrated Delivery Networks and corporate
entities, but have not yet sold a CHOICE Web site to either of these target
client groups. The following is an example of Web pages from a CHOICE Web site
we developed and host for Hallmark Health.
[Screen shots of co-branded CHOICE Web site, with the following captions:
Co-branded CHOICE site designed for Hallmark Health, Malden,
Massachusetts.
Professionals can access databases, reference materials, the latest news
and CME courses to assist in patient care and in research.
Patients can search 3,000 different brochures for information on
specific diseases, illnesses and conditions.
Health-conscious consumers can access Wellness Centers, reference
materials for lay persons and our award-winning Healthy Living Webzines to
help them lead a healthier lifestyle.]
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CONTENT SYNDICATION
We selectively syndicate portions of our content libraries to other
high-traffic, health-related Web sites pursuant to licensing agreements. Through
syndication, we are able to drive additional traffic to the HealthGate Network
in order to further increase awareness of the HealthGate brand and develop
additional advertising, sponsorship and e-commerce revenue opportunities. Our
name, embedded with a link to our www.healthgate.com Web site, is displayed on
each page viewed by the user accessing our syndicated content through third
party Web sites. In addition to generating licensing fees, most of these
syndication arrangements provide for sharing advertising and sponsorship revenue
generated through these Web sites. To date, we have not recognized any revenue
from advertising and sponsorship on these Web sites. Presently, we have
syndication affiliations with WebMD, Inteli-health, America's Health Network,
the American Medical Association and MedCast.
ACTIVEPRESS SERVICE FOR PUBLISHERS
Our activePress service, which was launched in 1998, provides a full service
Web-based solution to publishers and other parties that wish to offer Web-based
access to print materials or databases. Through this service, healthcare
publishers can reach an Internet audience through Web sites we host. The
activePress service utilizes our existing technology platform and expertise to
develop and host Web sites, convert the publisher's information for the Internet
and link the published information with relevant databases, such as MEDLINE,
enabling the publisher to deliver an enhanced electronic version of the print
publication to subscribers, institutions and authorized third parties. As a
result of these relationships, we also hold Web hosting rights to these
publications, requiring anyone seeking an online article from one of these
journals to access the publication either through the activePress enabled site
or through the HealthGate Network.
activePress service revenue includes fees for converting, hosting and
storing information and providing support and maintenance. Additionally,
transactional revenue is derived from fees associated with users' access to the
publisher's content. These fees, which may be paid by the user or the publisher,
are derived on a per subscriber, per page or per article basis.
Blackwell Science and Massachusetts Medical Society, the publisher of THE
NEW ENGLAND JOURNAL OF MEDICINE, are currently clients of our activePress
service. See "Strategic Affiliations."
ADVERTISING AND SPONSORSHIP
The depth and breadth of our content and the variety of our distribution
channels developed for specific audiences of healthcare consumers offer
advertisers and sponsors opportunities to target their messages to particular
user groups. Advertisers may target groups by demographics such as gender and
geographic location or advertise more broadly to the general population of
health information users. The HealthGate Network's underlying technology
platform recognizes a wide range of information about individual users. This, in
turn, allows us to selectively target banner advertisements to users viewing
specific topics or content sources. For example, we can place a banner
advertisement for Tylenol on all users' screens searching our content for
information on headaches. We also intend to offer advertisers the opportunity to
employ one-to-one advertising or niche marketing. This type of advertising
allows advertisers to target individual users based on registration details,
both through banner advertising and through e-mail.
We track banner advertising impressions and click-through rates for these
advertisements and issue a NetGravity Traffic Report weekly to our advertisers.
Statistics provided to both potential and current advertisers about our traffic
patterns are audited by Audit Bureau of Circulation Interactive to assure
accuracy.
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Recent advertisers on the HealthGate Network have included the following
pharmaceutical companies, manufacturers of consumer and health goods, providers
of health information and others.
- Pharmaceutical companies, including American Home Products (Enbrel),
Johnson & Johnson (Tylenol and Procrit), Pfizer (Zithromax and Zyrtec),
Schering Plough (Claritin) and Biogen (Avonex);
- Consumer health goods, including HealthShop.com (vitamins and supplements)
and SelfCare (health aids);
- Providers of health information, including McGraw-Hill (books), MD Consult
(their Web site) and W.B. Saunders (books); and
- Others, including CondeNet, Entrepreneur Magazine, the U.S. Air Force, the
U.S. Navy and the WALL STREET JOURNAL.
We offer sponsorship opportunities, including exclusive arrangements, to
companies that wish to target specific topics, content sources or CHOICE Web
sites. Sponsorships are designed to support broad marketing objectives,
including branding and product introductions, generally on an exclusive basis.
For example, sponsorships allow businesses to have their name, message or
products appear together with a link to their own Web site in every page of a
Healthy Living Webzine, a CHOICE Web site or a condition specific Wellness
Center. Sponsorships are sold for specific periods of time and portions of the
Web site.
The following screen illustrates opportunities for advertising and
sponsorship on a Wellness Center within a co-branded CHOICE Web site:
[Screen shot of a co-branded CHOICE Web site, with lines indicating logo,
advertising, sponsorship and additional feature areas of the page.]
E-COMMERCE
Currently, we use e-commerce to provide portions of our licensed content,
including PsycINFO, Well Connected, the EMBASE Cardiology Consultant and full
text journals via the activePress service on a pay per view or transaction fee
basis. In addition, we provide users the opportunity to purchase medical
textbooks and other print products from MedBookStore, a Web-based medical
bookstore from Medsite Publishing, and photocopies of articles not available
from our collection of full-text journals from Infotrieve, a document delivery
service. Also, users can subscribe to certain fee-based content sources on a
monthly basis.
We believe that significant opportunities exist to provide healthcare
related products to professionals, patients and consumers using our technology
platform and the HealthGate Network. In order to pursue these opportunities, we
are exploring options for expanding the products and services currently offered
using e-commerce.
SALES AND MARKETING
We sell our products and services through our own direct sales force and
through value added resellers. Our direct sales force consists of two teams: (1)
CHOICE Web site sales; and (2) advertising and sponsorship sales. We divide the
United States and Canada into seven direct sales regions for CHOICE Web site
sales and assign direct sales representatives to each region. Our CHOICE Web
site sales team consists of two groups, outside sales and inside sales. The
outside sales group is responsible for delivering focused and targeted marketing
for CHOICE Web sites, content syndication customers and other customers,
increasing consumer awareness of the HealthGate brand and establishing campaigns
to develop brand loyalty. Our inside sales group is responsible for facilitating
the entire sales
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process, identifying leads through telemarketing and supporting our customers.
The inside sales group's support functions include maintenance of customer and
prospect databases, online demonstration sessions, preparation of presentations
and proposals and development of relationships with current and future clients.
Our advertising and sponsorship sales efforts are conducted from our
headquarters in Burlington, Massachusetts.
In addition to our direct sales force, we have established a value added
reseller relationship with Data General. Through this relationship, we leverage
the cross selling opportunities offered by Data General's worldwide healthcare
sales force in their sales calls on their customer base of approximately 1,200
hospitals. See "--Strategic Affiliations."
In Europe, our sales efforts are coordinated through our subsidiary,
HealthGate Europe, Limited, based in London. HealthGate Europe concentrates its
efforts on licensing our syndicated content to third parties and developing
additional activePress relationships.
We presently market our products and services through traditional means,
including direct mail, print advertising and telemarketing. In addition, we also
use Web-based banner advertising and sponsorship on our own Web sites, portions
of the HealthGate Network and other third-party sites, targeted linking on the
HealthGate Network and e-mail alerts to registered users of our own Web sites.
We are considering adding radio and television advertising to our marketing
efforts.
We expect to use portions of the net proceeds of this offering to expand our
sales and marketing efforts. See "Use of Proceeds."
CUSTOMER SERVICE
We are committed to providing a high level of service and support to our
clients and users. We believe that customer service is important to our ability
to attract and retain clients and users. We provide service and support via a
toll-free telephone number, e-mail and, on the Web site itself, through help
screens and Frequently Asked Questions (FAQ) areas. The customer service staff
includes medical librarians who are experienced in medical information
retrieval. We intend to add additional staff in the third quarter of 1999 in
order to extend customer service coverage into evening hours and weekends.
TECHNOLOGY PLATFORM
Our technology, consisting of internally developed and commercially
available software programs, is designed to leverage the benefits of modular
components so that all elements of our various content libraries and other
databases can be channeled into one unified platform. From this platform, we can
quickly and easily adapt all of this content and other data for numerous online
applications, such as: (1) standardizing the appearance of disparate content
sources; (2) integrating advertising and sponsorship; and (3) facilitating
information retrieval for our customers and users. In addition, the modular
composition of our technology platform enables us to reuse, update, scale,
extend and replace components as needed. As content is added to our technology
platform and moves through the various modules during processing, each
individual module adds specific and unique features and functionality to the
content.
There are three specific groups of modules: (1) Content Standardization; (2)
Content Enhancement; and (3) Content Delivery. Unless otherwise noted, all
modules are either available through the HealthGate Network or through our
activePress service. We plan to integrate modules presently available only
through our activePress service into the HealthGate Network.
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CONTENT STANDARDIZATION
CONTENT NORMALIZATION. The content normalization module converts original
content, regardless of format supplied by the content provider, into a single,
consistent Extensible Markup Language (XML) format. XML is a markup language
used to identify structures and their roles within a document. For example,
words within a document are classified as structures. The specific words in the
document's footnotes are indicative of the role these words, or structures, have
in the document. Meta-information, or information describing the content
supplied by the provider, is retained. However, this module adds additional
tagging to the provider-supplied meta-information for use in the searching,
topics and dynamic formatting modules. The use of XML in the content
normalization module enables us to offer, through other modules, multiple
product offerings with different features, while using the same content from the
same repository.
CONTENT ANALYSIS. The content analysis module attaches value-added
information to content. For example, footnotes, endnotes or bibliographies from
journal articles are linked to abstracts or more detailed information found in
other content sources such as MEDLINE. Features under development include the
linking of drug trade names to a pharmaceutical source, identifying company
names and providing appropriate links to other sources and associating content
with various conditions, illnesses or related topics.
CONTENT MATCHING. The content matching module integrates three separate
databases enabling them to interact and relay information to each other as a
user moves through our various content sources. The different databases are
Users, Content Sources and Usage. The content matching module tracks individual
users (Users) through the HealthGate Network, recording what content they use
(Content Source), and recording the transaction for later use (Usage).
CONTENT ENHANCEMENT
AUTHENTICATION, ACCESS CONTROL AND E-COMMERCE. The authentication, access
control and e-commerce module confirms a user's identity, allows the user access
to the various content sources and records any transaction or usage for that
user. This module is analogous to a content store, offering access to content on
a fee per use basis. These sales can be via a one-time credit card transaction
or through institutional access. This module allows us to package content
through different methods to different user groups using various pricing models.
For example, information from a particular journal can be sold to the user by
year, by the issue, by the article, or even by the page.
SEARCHING. The searching module, using our ReADER search software that
provides a natural language searching tool, enables professionals, patients and
consumers access to content without regard for the level of their expertise,
knowledge of medical terms, or knowledge of specific database searching
commands. For example, if a user searches the MEDLINE database for the common
concept "CAT Scan," the ReADER tool would translate that phrase into a search
for the medical term "Tomography, X-Ray Computed" yielding more relevant
results.
TOPICS. The topics module creates topic hierarchies or organizes specific
content for the professionals, patients, or consumers according to pre-defined
algorithms. Topics are created using both searching and keyword technologies.
Patient and consumer topics are organized by medical condition. Professional
topics are organized by medical specialty. Topics allow for quick access to the
latest information without requiring the user to search multiple content
sources.
ADVERTISING. The advertising module enables us to target specific
advertisements to individuals or groups based on demographic information, user
registration, or specific content sources. For example, a user searching for
information on headaches could be shown an advertisement for Tylenol. This
module also handles scheduling of advertisements, reporting of results to
advertisers and the placement and screening of advertisements.
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PERSONALIZATION. The personalization module enables content to be
customized for the individual user. Among the features provided through this
module are user-managed subscriptions and commerce, e-mail updates and saved
searches. A new feature under development will allow a user to create a
customized Web page displaying only information based upon a user provided
profile. Personalization is currently available through our activePress service
and is being integrated into the HealthGate Network.
RELEVANT INFORMATION LINKING. The relevant information linking module
enables dynamic cross-referencing or linking among related content and features.
For example, content targeted for the physician can be linked to corresponding
patient education materials, enabling the physician to produce a customized
brochure handout, written specifically for the patient, without accessing
multiple content sources.
COMMUNITY BUILDING. Currently under development, the community building
module will enable users to interact and establish relationships with other
users possessing similar health-oriented interests. For example, discussion
groups can be formed around specific conditions, individual journal articles, or
treatment options. An option currently available called "Send to a Friend"
enables users to send e-mail, with a link to a specific article from content
available from HealthGate, to friends or colleagues.
ADAPTIVE PROFILING. Currently under development, the adaptive profiling
module modifies what a user sees or is alerted to based upon the user's
behavior, usage of a particular content source and navigation by the user
through the site.
CONTENT DELIVERY
DYNAMIC FORMATTING. The dynamic formatting module allows for active layout
of content for presentation to the user. Formatting can be based upon a specific
user's registration information, the type of content the user is viewing, the
CHOICE Web site and access point. The utilization of Extensible Style Language
(XSL) allows for quick and efficient formatting modifications. For example, XSL
converts or transforms information stored in XML into other data formats, such
as Hypertext Markup Language (HTML), used to construct most Web pages. This
module gives us the option of having multiple product offerings with different
features, while using the same content from the same repository.
COMPETITION
The market for Internet services and products is relatively new, intensely
competitive and rapidly changing. With no substantial barriers to entry, over
15,000 Web sites presently offer users healthcare content and products and
services, and we expect that competition will continue to grow. We compete,
directly and indirectly, for subscribers, consumers, content and service
providers, advertisers, sponsors and acquisition candidates with a variety of
companies from traditional healthcare print publishers and distributors, to
health focused and general Web sites, to large healthcare information systems
companies.
Many of our competitors enjoy significant competitive advantages including:
greater resources that can be devoted to the development, promotion and sale of
their products and services; longer operating histories; greater brand
recognition; and larger customer bases.
We believe that the principal competitive factors in our target markets are
comprehensiveness of content, integration with existing technologies, brand name
recognition, performance, ease of use, pricing, features and quality of support.
We also believe that we are the only provider among our competitors to serve all
of our target markets and that the combination of the depth and breadth of our
content libraries and the flexibility of our technology platform allows us to
compete favorably in
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each of our target markets. See "Risk Factors--We face intense competition in
providing our Internet-based healthcare information products and services."
GOVERNMENTAL REGULATION
Currently, there are a number of laws that regulate communications or
commerce on the Internet. Federal, state, local and foreign governments and
agencies are considering laws and regulations that address issues such as user
privacy, pricing, online content regulation, taxation and the characteristics
and quality of online products and services. In addition, several
telecommunications carriers have petitioned the Federal Communications
Commission to regulate Internet service providers and online service providers
in a manner similar to long distance telephone carriers and to impose access
fees on these providers. Regulation of this type, if imposed, could
substantially increase the cost of communicating on the Internet.
Internet user privacy has become an issue both in the United States and
abroad. The Federal Trade Commission and government agencies in some states and
countries have been investigating certain Internet companies regarding their use
of personal information. Any regulations imposed to protect the privacy of
Internet users may affect the way in which we currently collect and use personal
information.
As is typical with most Web sites, our Web sites place "cookies" on a user's
hard drive without the user's knowledge or consent. This technology enables Web
site operators to target specific users with a particular advertisement and to
limit the frequency with which a user is shown a particular advertisement.
Certain currently available Internet browsers allow users to modify their
browser settings to remove cookies at any time or to prevent cookies from being
stored on their hard drives. If this technology is reduced or limited, the
Internet may become less attractive to advertisers and sponsors.
It may take years to determine the extent to which existing laws related to
issues such as intellectual property ownership and infringement, libel,
obscenity and personal privacy are applicable to the Internet and for new laws
to be adopted. Any new laws or regulations relating to the Internet, or the
application or interpretation of existing laws, could slow the growth in the use
of the Internet, decrease demand for our Web sites or otherwise materially
adversely affect our business. See "Risk Factors--Government regulation of the
Internet might result in the imposition of access fees which could adversely
affect our business," "--Privacy related regulation of the Internet could
adversely affect our business," "--New tax treatment of companies engaged in
Internet commerce may adversely affect the Internet industry and our company"
and "--Governmental or other licensing bodies may file claims against us based
on the medical nature of the content we make available to patients and other
consumers."
INTELLECTUAL PROPERTY
We regard our intellectual property as important to our business, and we
rely upon trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with our employees, customers,
strategic partners and others to protect our rights in this property. Effective
trademark, copyright and trade secret protection may not be available in every
country in which our products and media properties are distributed or made
available through the Internet. Therefore, we can not guarantee that the steps
we have taken to protect our proprietary rights will be adequate to prevent
infringement or misappropriation by third parties or will be adequate under the
laws of some foreign countries which may not protect our proprietary rights to
the same extent as do the laws of the United States.
We license almost all of our content from third parties. Although under most
of our license agreements, the licensor has agreed to defend and indemnify us
for losses with respect to third-party
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claims that the licensed content infringes third-party proprietary rights, we
can not assure you that these provisions will be adequate to protect us from
infringement claims.
We also rely on a variety of technologies that are licensed from third
parties, including our database and Internet server software, which is used for
our Web sites to perform key functions. These third-party licenses may not be
available to us on commercially reasonable terms in the future. The loss of or
inability to maintain any of these licenses could delay the introduction of
software enhancements, interactive tools and other features until equivalent
technology can be licensed or developed. See "Risk Factors--Our business may
suffer if we are not able to effectively protect our intellectual property
rights."
EMPLOYEES
As of March 31, 1999, we had a total of 54 full-time employees. Of these
employees, 31 serve in research and development, 5 serve in administration and
18 serve in sales and marketing. None of our employees is represented by a labor
union. We consider our relations with employees to be good.
FACILITIES
Our principal executive offices are located in Burlington, Massachusetts, in
approximately 20,600 square feet of space occupied under a lease which expires
on June 30, 2000. We have an option to lease the space for an additional five
year term. In addition to the Burlington space, our central computer facility is
located at an Exodus Communications, Inc. Internet Data Center in Waltham,
Massachusetts. We believe that current space is adequate and that additional
space is available for expansion if needed.
LEGAL PROCEEDINGS
We are not currently a party to or aware of any material legal proceedings
involving us.
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MANAGEMENT
The following table sets forth certain information regarding our executive
officers, key employees and directors as of March 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------------ --- ---------------------------------------------------
<S> <C> <C>
William S. Reece...................................... 33 Chairman of the Board of Directors, President and
Chief Executive Officer
Mary B. Miller........................................ 41 Chief Financial Officer and Treasurer
Mark A. Israel........................................ 30 Chief Technology Officer
Hamid Tabatabaie...................................... 37 Vice President of Sales and Marketing
Rick Lawson........................................... 39 Vice President of Content and Secretary
Tina M. H. Blair, M.D. (1)............................ 51 Director
Jonathan J. G. Conibear (1)........................... 47 Director
Edson D. de Castro (2)................................ 60 Director
David Friend (2)...................................... 51 Director
Chris H. Horgen (1), (2).............................. 52 Director
</TABLE>
- ------------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
WILLIAM S. REECE is a founder of HealthGate and has served as a member of
our board of directors and our President and Chief Executive Officer since our
inception in 1994. Mr. Reece has served as the Chairman of our board of
directors since December 1994. From June 1988 to May 1994, Mr. Reece served in
several positions, including Vice President, Sales and Marketing, Manager of
U.S. Sales and Marketing Representative at PaperChase, a medical literature
retrieval software company owned by Beth Israel Hospital in Boston.
MARY B. MILLER has served as our Chief Financial Officer and Treasurer since
April 1999. From 1998 to 1999, Ms. Miller was self-employed as a financial
consultant for small and medium sized high technology firms. From 1996 to 1998,
Ms. Miller was Vice President of Finance and Chief Financial Officer of
Multilink, Inc., a communications company. From 1988 to 1996, Ms. Miller held
several positions at Progress Software Corporation, a publicly-traded computer
software company, including Director of Finance and Administration and Chief
Accounting Officer, U.S. Controller and Assistant Controller. Ms. Miller is a
Certified Public Accountant.
MARK A. ISRAEL has served as our Chief Technology Officer since July 1997.
From September 1995 to July 1997, Mr. Israel served as a system architect and
director at Individual Inc., an Internet news company. From September 1992 to
September 1995, Mr. Israel served as a Senior Consultant at Fusion Systems
Group, a software consulting firm. From 1991 to September 1992, Mr. Israel
served as a Consultant at Cambridge Technology Partners, a software consulting
firm.
HAMID TABATABAIE has served as our Vice President of Sales and Marketing
since April 1998. From January 1998 to April 1998, Mr. Tabatabaie served as the
Chief Executive Officer of System Architects Inc., a patient educational
interaction and entertainment company he founded. From 1993 to 1997, Mr.
Tabatabaie was Chief Executive Officer of System Concepts Associates, a health
care information systems consulting and integration company that later merged
with Multimedia Medical Systems. From 1990 to 1993, Mr. Tabatabaie served as
national health care sales director for Data General Corporation.
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RICK LAWSON is a founder of HealthGate and has served as our Vice President
of Content and Secretary since November 1994. From November 1987 to November
1994, Mr. Lawson served in several positions, including Vice President, Account
Services/Operations, Director of User Services and Manager of Customer Service
at PaperChase, a medical literature retrieval software company owned by Beth
Israel Hospital in Boston.
TINA M. H. BLAIR, M.D. has served as a member of our board of directors
since March 1995. Since 1995, Dr. Blair has served as a partner and Director of
Emergency Medicine for Emergency Medical Associates of New Jersey, based at
Mountainside Hospital in Montclair, New Jersey. From 1992 to 1995, Dr. Blair
served as a physician on the staff at Addison Gilbert Hospital in Gloucester,
Massachusetts.
JONATHAN J. G. CONIBEAR has served as a member of our board of directors
since December 1996. Since 1986, Mr. Conibear has served as Executive Director
of Blackwell Science, Ltd., the largest publisher of medical societies' journals
and one of the world's largest medical publishers, with headquarters in Oxford,
UK. From 1985 to 1997, Mr. Conibear had other responsibilities with Blackwell
Science, including President, Blackwell Science Inc., Blackwell's U.S.
subsidiary, Chair, Blackwell's Asian subsidiary, and Sales Director. From 1974
to 1985, Mr. Conibear served in various positions with Oxford University Press.
EDSON D. DE CASTRO has served as a member of our board of directors since
February 1995. Since 1997, Mr. de Castro has been a self-employed business
consultant. From 1992 to 1997, Mr. de Castro was Chairman of Xenometrics Corp.,
a biotech company. From 1989 to 1990 Mr. de Castro was Chairman of the Board of
Directors of Data General Corporation. From 1968 to 1989, Mr. de Castro served
as President and Chief Executive Officer of Data General. Mr. de Castro is a
director of Boston Life Sciences, Inc., a biotechnology company, AVAX
Technologies, Inc., a biopharmaceutical company, and of UOL Publishing Inc., a
publisher of educational courseware for Internet training programs. Mr. de
Castro is also a trustee of Boston University and a Member of the Visiting
Committee of Clark University School of Management. Mr. de Castro is also a
Member of the Corporation of Partners Healthcare System Inc.
DAVID FRIEND has served as a member of our board of directors since March
1995. Since 1995, Mr. Friend has also served as Chairman of the Board of
Directors of FaxNet Corp., a provider of messaging services to the
telecommunications industry. During 1994 and 1995, Mr. Friend served as a
lecturer at Massachusetts Institute of Technology. From 1983 to 1994, Mr. Friend
served as Chairman of the board of directors of Pilot Software, an international
software firm. Mr. Friend is also a Director of Nichols Research Corporation, a
publicly-traded information technology company.
CHRIS H. HORGEN has served as a member of our board of directors since
October 1995. Since 1991, Mr. Horgen has served as Chairman of the Board of
Directors and Chief Executive Officer of Nichols Research Corporation, a
publicly-traded information technology company. From 1976 to 1997, Mr. Horgen
also served in a number of other positions with Nichols Research, including
Chief Executive Officer, Co-Chairman of the board of directors, and Executive
Vice President. Mr. Horgen is also a Director of South Trust Bank of Alabama,
N.A.
Executive officers of HealthGate are elected by the board of directors on an
annual basis and serve at the pleasure of the board of directors. There are no
family relationships among any of our executive officers or directors.
Pursuant to an amended and restated stockholders agreement, which will
terminate upon the closing of this offering, stockholders owning a majority of
our outstanding shares have agreed to elect as directors (1) a designee of GE
Capital Equity Investments, (2) two designees of our founders, William S. Reece,
Rick Lawson and Barry Manuel, (3) two designees of the holders of Series A
preferred stock, and (4) one designee of the holders of Series B preferred
stock. Mr. Reece and
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Mr. de Castro are the founders' designees; Mr. Friend and Dr. Blair are the
Series A holders' designees and Mr. Horgen is the Series B holders' designee. To
date, GE Equity Capital Investments has not designated a person to serve as a
director.
In connection with its purchase of shares of our Series E preferred stock,
GE Capital Equity Investments, Inc. obtained the right, which it has not
exercised, to appoint a director to our board of directors. Additionally, we
have agreed that effective upon a public offering of our common stock, unless
waived by GE Capital Equity Investments, we will nominate and recommend for
election as a director a designee of GE Capital Equity Investments.
CLASSIFIED BOARD OF DIRECTORS
Our amended and restated certificate of incorporation and bylaws provide
that the size of the board shall be determined by resolution of the board. The
board is currently composed of six members.
Our stockholders have approved an amended and restated certificate of
incorporation that will take effect upon the closing of this offering and will
include a provision to establish a classified board of directors. Upon the
closing of this offering, our board of directors will be divided into three
classes. One class of directors will be elected each year at the annual meeting
of stockholders for a term of three years. Dr. Blair and Mr. Friend will serve
in the class whose term expires at the annual meeting of stockholders in 2000;
Mr. Horgen and Mr. Conibear will serve in the class whose term expires at the
annual meeting of stockholders in 2001; and Mr. Reece and Mr. de Castro will
serve in the class whose term expires at the annual meeting of stockholders in
2002. All directors will hold office until their successors have been duly
elected and qualified.
BOARD COMMITTEES
We have established an Audit Committee and a Compensation Committee.
AUDIT COMMITTEE. The Audit Committee consists of Messrs. de Castro, Friend
and Horgen. The Audit Committee's primary responsibilities are to assist the
board of directors by making recommendations to the board regarding the
selection of independent auditors, reviewing the results and scope of the audit
and other services provided by our independent auditors, and reviewing our
balance sheet, statement of operations and cash flows.
COMPENSATION COMMITTEE. The Compensation Committee consists of Dr. Blair
and Messrs. Conibear and Horgen. The Compensation Committee makes
recommendations to the board concerning salaries and incentive compensation for
our employees and consultants, including all executive officers and the Chief
Executive Officer.
DIRECTOR COMPENSATION
Directors of HealthGate who are also our employees will not receive
additional compensation for serving as directors. As compensation for their
services in 1996 through 1998, in December 1996, each of our non-employee
directors was granted stock options for the purchase of 34,230 shares of our
common stock under our 1994 Stock Option Plan. These options have an exercise
price of $1.01 per share, vested in three equal annual installments in 1996,
1997, and 1998 and expire in December 2001.
As compensation for their services in 1999 through 2001, in January 1999,
each of our non-employee directors was granted stock options for the purchase of
11,410 shares of our common stock under our 1994 Stock Option Plan. These
options have an exercise price of $0.77 per share, vest in three equal annual
installments in January 1998, 1999, and 2000, based on continuing service as a
director through each applicable period and expire in January 2004.
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<PAGE>
In addition, Mr. de Castro was granted options to purchase an additional
11,410 shares of our common stock in November 1997 for consulting services he
rendered to us after the option grant date and prior to December 31, 1998. This
option has an exercise price of $0.43 per share, fully vested during 1998 and
expires in November 2002.
Our directors do not receive cash remuneration for their services as
directors. We currently reimburse our non-employee directors for the
out-of-pocket expenses they incur in connection with rendering services as
directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers serves as a member of the board of directors
or compensation committee of any entity that has one or more of its executive
officers serving as a member of our board of directors or Compensation
Committee. Our Compensation Committee currently consists of Dr. Blair and
Messrs. Conibear and Horgen, none of whom has ever been an officer or employee
of HealthGate.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to or earned during the
year ending December 31, 1998 by our Chief Executive Officer and our two other
most highly compensated executive officers (the "Named Executive Officers")
whose total salary and bonus exceeded $100,000 for services rendered to
HealthGate in all capacities during 1998. No executive officer who would
otherwise have been included in such table on the basis of salary and bonus
earned for fiscal year 1998 has resigned or otherwise been terminated as of the
date of this prospectus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------------
ANNUAL COMPENSATION SECURITIES
----------------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($)
- -------------------------------------------- --------- ----------- ----------- ----------- -------------------
<S> <C> <C> <C> <C> <C>
William S. Reece............................ 1998 138,583 66,500(1) 296,660(2) --
President and Chief
Executive Officer
Mark A. Israel.............................. 1998 126,000 32,000(1) 136,920 --
Chief Technology Officer
Hamid Tabatabaie(3)......................... 1998 151,846 -- 187,124 --
Vice President of Sales and Marketing
</TABLE>
- ------------------------
(1) Represents amounts awarded in January 1999 for bonuses earned in 1998.
(2) Excludes a non-incentive stock option granted in January 1998 for 45,640
shares of our common stock, awarded as a bonus for services rendered in 1996
and 1997.
(3) Mr. Tabatabaie was elected by the board of directors to serve as Vice
President of Sales and Marketing on May 22, 1998. Mr. Tabatabaie's 1998
salary includes commissions and reflects compensation earned from April
through December 1998.
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<PAGE>
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1998
The following table sets forth information concerning the individual grants
of stock options to each of the Named Executive Officers during the fiscal year
ending December 31, 1998. All options were granted under our 1994 Stock Option
Plan.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL
-------------------------------------------- RATES OF STOCK PRICE
NUMBER OF PERCENT OF TOTAL APPRECIATION FOR
SECURITIES OPTIONS GRANTED TO OPTION TERM (1)
UNDERLYING OPTIONS EMPLOYEES IN FISCAL EXERCISE EXPIRATION ----------------------
NAME GRANTED (#) YEAR(%)(2) PRICE($/SH) DATE 5%($) 10%($)
- -------------------- ------------------- ----------------------- ------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
William S. Reece.... 342,300(3) 36.0 1.635 1/23/03 $ 154,466 $ 341,953
Mark A. Israel...... 136,920 14.4 1.635 1/23/03 $ 61,787 $ 136,781
Hamid Tabatabaie.... 187,124 19.7 0.657 5/22/03 $ 33,932 $ 75,117
</TABLE>
- ------------------------
(1) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date. These assumptions are not intended to forecast future
appreciation of our stock price. The potential realizable value computation
does not take into account federal or state income tax consequences of
option exercises or sales of appreciated stock. The actual gains, if any, on
the stock option exercises will depend on the future performance of the
common stock, the optionee's continued employment through applicable vesting
periods and the date on which the options are exercised and the underlying
shares are sold.
(2) In 1998, we granted options to employees to purchase an aggregate of 951,594
shares of common stock.
(3) Includes a non-qualified option for 45,640 shares fully vested upon grant
and an incentive stock option for 296,660 shares, 1/3 of which vested on
January 23, 1999, 1/3 of which will vest on January 23, 2000, and the
remaining 1/3 of which will vest on January 23, 2001, subject to Mr. Reece's
continuing employment with HealthGate.
AGGREGATED OPTION EXERCISES IN 1998
AND 1998 YEAR-END OPTION VALUES
The following table sets forth certain information with respect to the
number and value of unexercised options held by the Named Executive Officers on
December 31, 1998. None of the Named Executive Officers exercised stock options
in 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS AT
AT FISCAL YEAR-END(#) FISCAL YEAR-END($)(1)
-------------------------- --------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
William S. Reece.......................................... 45,640 296,660 $ 427,419 $ 2,778,221
Mark A. Israel............................................ 47,465 232,080 $ 444,510 $ 2,173,429
Hamid Tabatabaie.......................................... 0 187,124 -- $ 1,935,424
</TABLE>
- ------------------------
(1) There was no public trading market for the common stock on December 31,
1998. Accordingly, for purposes of this table, the values in these columns
have been calculated assuming an initial public offering price of $11.00 per
share (rather than a determination of the fair market value of the common
stock on December 31, 1998), less the aggregate exercise price of the
options.
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EMPLOYEE BENEFIT PLANS
1994 STOCK OPTION PLAN. Our 1994 Stock Option Plan was adopted by the board
of directors and approved by the stockholders in June 1994. The 1994 Stock
Option Plan provides for the grant of "incentive stock options" intended to
qualify under Section 422 of the Internal Revenue Code and stock options that do
not so qualify. The granting of incentive stock options is subject to the
limitations set forth in the 1994 Stock Option Plan. Our directors, officers,
employees and consultants are eligible to receive grants under the 1994 Stock
Option Plan. The purpose of the 1994 Stock Option Plan is to promote the
interests of HealthGate and our stockholders by encouraging and enabling
eligible employees and other persons affiliated with HealthGate to acquire stock
in HealthGate. We believe that the granting of options will stimulate the
efforts of these persons, strengthen their desire to remain with HealthGate,
provide them with more aligned interests in HealthGate's success and assure a
closer identification between them and HealthGate.
The 1994 Stock Option Plan is administered by our board of directors, which,
subject to the limitations on incentive stock options discussed above, has
authority to determine the optionees, the number of shares covered by an option,
the option exercise price, the term of the option, the vesting schedule and
other terms and conditions. The 1994 Stock Option Plan provides for the grant of
options covering up to 2,966,600 shares of common stock. If an option expires,
terminates or is forfeited for any reason during the term of the 1994 Stock
Option Plan without having been exercised in full, the shares subject to the
unexercised portion of such option will again be available for grant pursuant to
the 1994 Stock Option Plan.
As of May 10, 1999, options for a total of 2,141,739 shares of common stock
are outstanding under the 1994 Stock Option Plan. In addition, 6,138 shares of
common stock have been purchased pursuant to exercises of options. A total of
818,723 shares remain available for issuance under the 1994 Stock Option Plan.
401(K) PLAN. We have established a tax-qualified employee savings and
retirement plan, or the 401(k) Plan, which covers all of our full-time employees
who have completed three months of service. Under the 401(k) Plan, eligible
employees may defer up to 15% of their pre-tax earnings, subject to the Internal
Revenue Service's annual contribution limit. The 401(k) Plan permits additional
discretionary matching contributions by us on behalf of all participants in the
401(k) Plan in such a percentage amount as may be determined annually by the
board of directors. To date, we have made no matching contributions. The 401(k)
Plan is intended to qualify under Section 401 of the Internal Revenue Code so
that contributions by employees or by us to the 401(k) Plan, and income earned
on plan contributions, are not taxable to employees until withdrawn from the
401(k) Plan, and so that our contributions, if any, will be deductible by us
when made. The trustee under the 401(k) Plan, at the direction of each
participant, invests the assets of the 401(k) Plan in any of a number of
investment options.
EMPLOYMENT AGREEMENT
Under an employment agreement dated October 1, 1995, HealthGate agreed to
employ Mr. Reece as Chairman of the Board, President and Chief Executive Officer
of HealthGate for a period of three years beginning on October 1, 1995, to be
automatically renewed on an annual basis, unless either party does not wish to
extend the employment agreement, in which case the agreement will terminate
three years from the applicable renewal date. Under the agreement, Mr. Reece's
minimum base salary is $110,000 per annum, subject to annual review by the board
of directors. Mr. Reece is also eligible to participate in any bonus programs we
adopt. Mr. Reece's 1998 annual base salary was $142,000, plus a bonus of
$66,500, as determined by the board of directors. Mr. Reece's 1999 annual base
salary is $200,000, and, pursuant to his employment agreement, he is eligible
for additional bonuses to be determined by the board of directors.
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We may terminate Mr. Reece's employment for malfeasance, nonfeasance or
breach of the employment agreement, as determined by 75% of the board of
directors. If we terminate Mr. Reece's employment for malfeasance, nonfeasance
or breach of the employment agreement, Mr. Reece will be entitled to receive a
lump sum severance payment equal to 12 months' compensation at his then-current
base salary, the amount of any bonus paid to him in the previous contract year,
and any accrued bonus through the date of termination, plus any benefits to
which he is entitled for 12 months following the date of termination. We may
also terminate Mr. Reece's employment if Mr. Reece is convicted of a felony
involving HealthGate. If we terminate Mr. Reece's employment for conviction of a
felony involving HealthGate, Mr. Reece will not be entitled to any further
compensation under the employment agreement, except as may be required by
applicable law.
In addition, Mr. Reece may elect to terminate the employment agreement for
good reason or following a change-in-control of HealthGate. In the event of an
election for good reason or change-in-control, Mr. Reece will be entitled to a
lump sum severance payment equal to 12 months' compensation at his then-current
base salary, any accrued bonus through the date of election, plus any benefits
to which he is entitled for 12 months following the date of election.
We do not have employment agreements with any of our other employees or
executive officers.
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CERTAIN TRANSACTIONS
Pursuant to the terms of various leases, ranging in terms from at-will to
two years, in 1996, 1997 and 1998, we leased our main offices in Malden,
Massachusetts from Leonard School Associates, Inc., the owner of these offices
until December 1998. Pursuant to these leases, in 1996 we paid rent of
approximately $58,000, in 1997 we paid rent of approximately $84,000 and in 1998
we paid rent of approximately $89,000. Leonard School Associates is owned in
part by Barry M. Manuel, M.D. Dr. Manuel holds options to purchase 25,558 shares
of our common stock, and holds, for himself and through trusts for which he is
the trustee and has sole voting power, an aggregate of 1,369,200 shares of our
common stock. Dr. Manuel is also the father-in-law of William S. Reece, our
Chairman, President and Chief Executive Officer.
In March 1998, we entered into an Electronic Journal Software Development
and Management Agreement with Blackwell Science. Blackwell Science is the
holder, together with Blackwell Wissenshafts-Verlag GmbH, a wholly-owned
subsidiary of Blackwell Science, of all of our issued and outstanding Series D
Convertible Preferred Stock, and Jonathan Conibear, one of our directors, is an
Executive Director of Blackwell Science. Pursuant to this agreement, we have
agreed to develop and host through February 28, 2000, a Web site for Blackwell
Science's journals and other publications. We completed the development of this
Web site in 1998. Blackwell Science has paid a total of $1,050,000 for the
development and hosting of the Web site. Total fees payable to us for continued
hosting and management of the Blackwell Science Web site during the initial term
of the agreement are expected to be approximately $350,000. During 1998 and
1997, our revenue from Blackwell Science represented 44% and 18% of our total
revenue for those respective years. In addition, pursuant to the terms of a
Stock Purchase Agreement dated as of December 20, 1996 between HealthGate and
Blackwell Science, in the event we attempt to expand into Europe or Asia, we
have agreed to negotiate in good faith with Blackwell Science to determine in
what manner Blackwell Science may serve as our primary strategic alliance
partner in connection with such expansion.
In May 1998, we purchased certain of the assets, principally computer
hardware and software and office furnishings, of Systems Architects, Inc. for
$70,000 in cash. Systems Architects, Inc. was a company owned by Hamid
Tabatabaie, our Vice President of Sales and Marketing.
In September 1998, we received a $2,000,000 convertible bridge loan from
Blackwell Science. The loan accrued interest at a rate of 12% per year. The
principal amount of this loan was converted into 174,729 Series E preferred
stock in April 1999 concurrently with, and at the same per share price as, the
private placement of Series E preferred stock to GE Capital Equity Investments,
Inc. Upon conversion, all accrued and unpaid interest due on this loan was paid
to Blackwell Science in cash.
In connection with the sale of Series B preferred stock to Nichols Research
Corporation in 1996, we agreed to use certain consulting services of Nichols
Research. In 1996, we paid Nichols Research approximately $203,000 for these
consulting services. Additionally in 1996, we paid Nichols Research
approximately $90,900 under a capital lease arrangement for computer equipment.
Nichols Research is one of our stockholders and Chris Horgen, one of our
directors, is Chairman of the Board of Directors of Nichols Research.
In April 1999, pursuant to the terms of a Stock Purchase Agreement, we
issued and sold 546,028 shares of our Series E preferred stock to GE Capital
Equal Investments for an aggregate consideration of $6,250,000 in cash.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of April 21, 1999 and as adjusted to reflect
the sale of the shares of common stock offered hereby by: (a) each person who we
know owns beneficially more than 5% of our common stock; (b) each of our
directors; (c) each of the Named Executive Officers; and (d) all of our
directors and executive officers as a group. Unless otherwise indicated, the
mailing address for each person and business entity listed below is c/o
HealthGate Data Corp., 25 Corporate Drive, Suite 310, Burlington, MA 01803.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY OWNED
(1)
SHARES --------------------------
BENEFICIALLY BEFORE THE AFTER THE
BENEFICIAL OWNER OWNED OFFERING OFFERING
- ------------------------------------------------------------------------------- ----------- ------------- -----------
<S> <C> <C> <C>
GE Capital Equity Investments, Inc............................................. 2,492,071 17.9% 13.5%
120 Long Ridge Road
Stamford, CT 06927
William S. Reece (2)........................................................... 2,403,630 17.1 12.9
Blackwell Science, Ltd. (3).................................................... 2,364,877 17.0 12.8
Oxney Mead, Oxford
OX2 0EL, United Kingdom
Jonathan J. G. Conibear (4).................................................... 2,364,877 17.0 12.7
Chris H. Horgen (5)............................................................ 2,145,349 15.4 11.6
Nichols Research Corporation................................................... 2,107,317 15.2 11.4
4040 Memorial Parkway, S.
Huntsville, AL 35802
Barry M. Manuel, M.D. (6)...................................................... 1,394,758 10.0 7.5
65 Wellesley Road
Belmont, MA 02478
Rick Lawson (7)................................................................ 958,440 6.9 5.2
David Friend (8)............................................................... 494,116 3.5 2.7
Tina M. H. Blair, M.D. (8)..................................................... 397,533 2.9 2.1
Edson D. de Castro (9)......................................................... 150,078 1.1 *
Mark A. Israel (10)............................................................ 93,105 *
Hamid Tabatabaie............................................................... -- *
Executive officers and directors as a group (8 persons) (11)................... 8,048,688 55.9% 42.3%
</TABLE>
- ------------------------
* Less than one percent of outstanding shares.
(1) Percentage ownership is based on 13,900,444 shares outstanding as of May 10,
1999. Shares of common stock subject to options currently exercisable or
exercisable within 60 days of June 15, 1999 are deemed outstanding for the
purpose of computing the percentage ownership of the person holding such
options but are not deemed outstanding for computing the percentage
ownership of any other person. Unless otherwise indicated below, the persons
and entities named in the table have sole voting and sole investment power
with respect to all shares beneficially owned, subject to community property
laws where applicable.
(2) Includes 144,450 shares of common stock issuable upon the exercise of stock
options.
(3) Includes 38,031 shares of common stock issuable upon the exercise of stock
options and 67,140 shares owned by Blackwell Wissenschafts-Verlag GmbH, a
wholly-owned subsidiary of Blackwell Science.
(4) Includes 38,031 shares of common stock issuable to Blackwell Science upon
the exercise of stock options, 2,020,418 shares of common stock owned by
Blackwell Science and 304,626 shares owned by Blackwell Wissenschafts-Verlag
GmbH. Mr. Conibear is Executive Director of Blackwell Science. Mr. Conibear
disclaims beneficial ownership of all shares issuable to or owned, directly
or indirectly, by Blackwell Science.
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(5) Includes 38,031 shares of common stock issuable to Mr. Horgen, individually,
upon exercise of stock options and 2,107,317 shares of common stock owned by
Nichols Research Corporation. Mr. Horgen is Chairman of the board of
directors of Nichols Research Corporation. Mr. Horgen disclaims beneficial
ownership of shares owned by Nichols Research.
(6) Includes 1,026,900 shares owned by Dr. Manuel, 342,300 shares held in trusts
for which Dr. Manuel serves as trustee for the benefit of his children and
grandchildren and 25,558 shares issuable to Dr. Manuel upon the exercise of
stock options. Dr. Manuel disclaims beneficial ownership of the 342,300
shares held in trust for the benefit of his children and grandchildren.
(7) Includes 45,640 shares of common stock issuable upon exercise of stock
options.
(8) Includes 38,031 shares of common stock issuable upon exercise of stock
options.
(9) Includes 111,055 shares of common stock issuable upon exercise of stock
options.
(10) Includes 93,105 shares of common stock issuable upon exercise of stock
options.
(11) Includes 508,347 shares of common stock issuable upon exercise of stock
options.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of HealthGate consists of:
- 20,000,000 shares of common stock, $0.01 par value per share;
- 1,000 shares of Series A Convertible Preferred Stock, par value $0.01;
- 1,000 shares of Series B Convertible Preferred Stock, par value $0.01;
- 1,000 shares of Series C Convertible Preferred Stock, par value $0.01;
- 1,667 shares of Series D Convertible Preferred Stock, par value $0.01; and
- 829,962 shares of Series E Convertible Preferred Stock, par value $0.01.
As of April 30, 1999, there were outstanding:
- 1,146,895 shares of common stock, held by 16 holders of record;
- 1,000 shares of Series A Stock, held by 16 holders of record;
- 1,000 shares of Series B Stock, held by one holder of record;
- 1,000 shares of Series C Stock, held by 22 holders of record;
- 1,667 shares of Series D Stock, held by two holders of record; and
- 720,757 shares of Series E Stock, held by two holders of record.
Effective upon the closing of this offering, the Series Stock will convert
into 8,666,019 shares of common stock.
Immediately after the closing of this offering, we will have 18,500,444
shares of common stock outstanding, assuming no exercise of options to acquire
690,000 additional shares of common stock or warrants to purchase 549,551
additional shares of common stock that are outstanding as of the date of this
prospectus.
Our amended and restated charter and our amended and restated bylaws will
each become effective upon the closing of this offering. Upon the effectiveness
of the amended and restated charter, our authorized capital stock will consist
of shares of common stock, $.01 par value per share, and
shares of preferred stock, $.01 par value per share.
The description set forth below gives effect to the filing of the amended
and restated charter and the adoption of the amended and restated bylaws. The
following summary is qualified in its entirety by reference to our amended and
restated charter and bylaws, copies of which are filed as exhibits to the
registration statement of which this prospectus is a part.
COMMON STOCK
Holders of common stock are entitled to one vote per share for each share
held of record on all matters submitted to a vote of stockholders. Holders of
common stock do not have cumulative voting rights, and therefore the holders of
a majority of the shares of common stock voting for the election of directors
may elect all of our directors standing for election. Subject to preferences
that may be applicable to the holders of outstanding shares of preferred stock,
if any, the holders of common stock are entitled to receive dividends as may be
declared by the board of directors. In the event of a liquidation, dissolution
or winding up of our affairs, whether voluntary or involuntary, and subject to
the rights of the holders of outstanding shares of preferred stock, if any, the
holders of shares of common stock shall be entitled to receive, on a pro rata
basis, all of our remaining assets available for distribution to our
stockholders. The holders of common stock have no preemptive, redemption,
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<PAGE>
conversion or subscription rights. All outstanding shares of common stock are,
and the shares of common stock to be issued pursuant to this offering will be,
fully paid and non-assessable.
PREFERRED STOCK
The board is authorized to issue, subject to any limitations prescribed by
Delaware law, preferred stock in one or more series. At the time of issuance,
and without further vote or action by the stockholders, the board can:
- establish the number of shares to be included in each series;
- fix the powers, designations, preferences and relative participating,
optional or other special rights, and the qualifications, limitations or
restrictions thereof, of the shares of each series; and
- increase or decrease the number of shares of any series, subject to the
existing number of authorized shares of preferred stock.
The board is authorized to issue preferred stock with voting, conversion and
other rights and preferences that could adversely affect the voting power or
other rights of the holders of common stock. Therefore, although we have no
current plans to issue shares of preferred stock, the issuance of preferred
stock or of rights to purchase preferred stock could have the effect of making
it more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, a majority of the outstanding voting stock of
HealthGate.
WARRANTS
HealthGate has issued warrants to purchase an aggregate of 549,551 shares of
common stock, subject to certain antidilution adjustments. Warrants to purchase
524,632 shares have an exercise price of $0.00004 per share and expire in March
2008. Warrants to purchase 24,919 shares have an exercise price of $ 2.51 per
share and expire in April 21, 2002. All warrants are fully vested and can be
exercised at any time. Holders of warrants to purchase 524,632 shares of common
stock are entitled to registration rights covering the shares of common stock
issuable upon exercise of these warrants. See "Shares Eligible for Future
Sale--Registration Rights."
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE RESTATED CHARTER AND BYLAWS
The amended and restated charter and the amended and restated bylaws contain
certain provisions that could discourage potential takeover attempts and make
more difficult attempts by stockholders to change HealthGate's management. The
amended and restated charter authorizes the board to issue, without stockholder
approval, shares of preferred stock in one or more series and to fix the voting
powers, preferences and rights and the qualifications, limitations and
restrictions of those shares. Although we have no current plans to issue
preferred stock, the issuance of preferred stock or of rights to purchase
preferred stock could make it more difficult for a third party to acquire, or
discourage a third party from attempting to acquire, a majority of our
outstanding voting stock.
The amended and restated charter also provides for the division of the board
of directors into three classes as nearly equal in size as possible with
staggered three-year terms and for removal of directors only for cause. The
classification of the board of directors and the limitation on removal of
directors only for cause could make it more difficult for a third party to
acquire, or discourage a third party from attempting to acquire, control of
HealthGate. The amended and restated charter further provides that stockholders
may act only at stockholders' meetings and not by written consent in lieu of a
stockholders' meeting. The amended and restated bylaws provide that nominations
for directors may not be made by stockholders at any annual or special meeting
unless the stockholder intending to make a nomination notifies HealthGate of its
intentions a specified number of days, generally 60, in advance of the meeting
and furnishes to HealthGate certain information regarding itself and the
intended
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nominee. These provisions could delay any stockholder actions that are favored
by the holders of a majority of our outstanding stock until the next
stockholders' meeting. These provisions may also discourage another person or
entity from making a tender offer for HealthGate's common stock, because that
person or entity, even if it acquired a majority of the outstanding common stock
could only take action at a duly called stockholders' meeting and not by written
consent. The amended and restated bylaws also provide that special meetings of
stockholders may be called only by the Chief Executive Officer or a majority of
the directors. In addition, a stockholder wishing to bring business before any
annual or special meeting of stockholders must give advance notice to the
corporation, generally 60 days prior to the meeting, describing the proposal and
providing information regarding all stockholders known to be supporting the
proposal, including any material interest the supporting stockholders may have
in the proposal.
LIMITATION OF LIABILITY
The amended and restated charter provides that no director will be
personally liable to HealthGate or to any stockholder for monetary damages
arising out of such director's breach of fiduciary duty, except to the extent
that the elimination or limitation of liability is not permitted by the Delaware
General Corporation Law. The Delaware General Corporation Law, as currently in
effect, permits charter provisions eliminating the liability of directors for
breach of fiduciary duty, except that directors remain liable for:
(1) any breach of the director's duty of loyalty to a company or its
stockholders;
(2) any acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
(3) any payment of a dividend or approval of a stock purchase that is
illegal under Section 174 of the Delaware General Corporation Law; or
(4) any transaction from which the director derived an improper personal
benefit.
A principal effect of this provision of the amended and restated charter is
to limit or eliminate the potential liability of our directors for monetary
damages arising from breaches of their duty of care, unless the breach involves
one of the four exceptions described in (1) through (4) above. The provision
does not prevent stockholders from obtaining injunctive or other equitable
relief against directors, nor does it shield directors from liability under
federal or state securities laws.
The amended and restated charter and the amended and restated bylaws further
provide for the indemnification of directors and officers to the fullest extent
permitted by Section 145 of the Delaware General Corporation Law, including
circumstances in which indemnification is otherwise discretionary. HealthGate
has entered into indemnification agreements with each of its directors and
officers, pursuant to which HealthGate has agreed to indemnify such directors to
the fullest extent permitted by law for amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 18,500,444 shares of common
stock outstanding, including 8,666,019 shares of common stock issuable upon
conversion of our outstanding preferred stock. Of these shares, the 4,600,000
shares we are offering will be freely tradable in the public market without
restriction or further registration under the Securities Act of 1933. However,
any shares purchased by our "affiliates," as that term is defined in Rule 144
under the Securities Act, may generally only be sold in compliance with the
limitations of Rule 144 described below. The remaining 13,900,444 shares of
common stock outstanding upon completion of this offering will be "restricted
securities" as that term is defined in Rule 144 under the Securities Act.
Restricted securities may not be sold except in compliance with the registration
requirements of the Securities Act or an applicable exemption under the
Securities Act, including an exemption pursuant to Rule 144.
SALES OF RESTRICTED SECURITIES
Upon the expiration of the lock-up agreements entered into by us, our
officers and directors and most of our stockholders in connection with this
offering, of the restricted securities may be sold pursuant to Rules
144 or 701, subject in some cases to the volume and other limitations imposed by
those rules. The remaining shares will be eligible for sale upon the
expiration of a one-year holding period, subject to the restrictions and
conditions of Rule 144.
In general, under Rule 144 as currently in effect, a person, including any
affiliate of HealthGate who has beneficially owned shares for at least one year,
will be entitled to sell in "brokers' transactions" or directly to market makers
within any three-month period commencing 90 days after the date of this
prospectus, a number of restricted securities that does not exceed the greater
of (1) 1% of the class of such shares then outstanding (approximately 185,004
shares immediately after this offering); or (2) the average weekly trading
volume of the common stock during the four calendar weeks immediately preceding
the sale. In addition, a person who is not an affiliate of HealthGate at any
time during the three months preceding any sale by such person, and who has
beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell such shares under Rule 144(k) without regard to the limitations
described above.
In addition, existing holders with an aggregate of 8,666,019 shares of
common stock have the right to require registration of their shares under
certain circumstances. However, these stockholders have entered into lock-up
agreements with respect to all shares owned by them, which provide that they
will not sell or otherwise dispose of any shares of common stock without the
prior written consent of SG Cowen Securities Corporation for a period of 180
days from the date of this prospectus. SG Cowen Securities Corporation may, in
its sole discretion and at any time without notice, release all or any portion
of the securities subject to lock-up agreements. See "Registration Rights" and
"Underwriting."
OPTIONS
As of May 10, 1999, options to purchase an aggregate of 1,132,761 shares of
common stock were fully vested. Of the total shares issuable pursuant to these
vested options, are subject to 180-day lock-up agreements. As of May
10, 1999, options to purchase an additional 1,262,735 shares of common stock
were outstanding but subject to future vesting, and an additional 816,123 shares
of common stock were available for future grants under our 1994 Stock Option
Plan. See "Management-- Employee Benefit Plans."
In general, under Rule 701 of the Securities Act, any employee, officer or
director of, or consultant or advisor to HealthGate who purchases shares from
HealthGate pursuant to a written compensatory stock option or other benefit plan
or written contract relating to compensation is eligible to resell such shares,
in each case commencing 90 days after the date of this prospectus, in reliance
on Rule 144, but without compliance with certain restrictions contained in Rule
144. Shares acquired
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pursuant to Rule 701 may be sold by nonaffiliates without regard to the holding
period, volume limitations, information or notice requirements of Rule 144, and
by affiliates without regard to the holding period requirement.
We intend to file one or more registration statements on Form S-8 under the
Securities Act to register all shares of common stock subject to outstanding
stock options and common stock issuable pursuant to our 1994 Stock Option Plan.
We expect to file these registration statements following the expiration of the
180-day lockup period described below, and these registration statements are
expected to become effective upon filing. Shares covered by these registration
statements will be eligible for sale in the public markets.
LOCK-UP AGREEMENTS
HealthGate, all of our executive officers and directors and existing
stockholders who, upon the closing of this offering, will beneficially own an
aggregate of shares of common stock, options to purchase
shares of common stock and warrants to purchase shares
of common stock, have agreed that for a period 180 days following the date of
this prospectus, without the prior written consent of SG Cowen Securities
Corporation, they will not
- directly or indirectly, offer, sell, assign, transfer, encumber, pledge,
contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to
purchase, lend or otherwise dispose of, other than by operation of law,
any shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock (including, without
limitation, common stock which may be deemed to be beneficially owned in
accordance with the rules and regulations promulgated under the Securities
Act); or
- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of common
stock whether any such transaction described above is to be settled by
delivery of common stock or such other securities, in cash or otherwise.
REGISTRATION RIGHTS
We have granted registration rights to most of our existing stockholders
covering:
- 5,376,506 shares of common stock issuable upon conversion of the Series
Stock and
- 524,632 shares of common stock issuable upon exercise of outstanding
warrants.
These shares are referred to as "Registrable Securities". In addition, under
a Registration Agreement with GE Capital Equity Investments, Inc., Blackwell
Science and Blackwell Wissenschafts-Verlag GmbH, we have granted registration
rights with respect to 3,289,534 shares of common stock issuable upon conversion
of the Series E Stock (the "GE-Blackwell Securities").
DEMAND REGISTRATION RIGHTS. Subject to certain limitations in the
registration agreements, the holders of at least 40% of the Registrable
Securities may require, on two occasions at any time after six months from the
closing of this offering, that we use our best efforts to register all or part
of the Registrable Securities on Form S-1 or any similar long-form registration
statement. In addition, subject to certain limitations in the registration
agreements, the holders of at least 25% of the Registrable Securities may also
require, on four occasions at any time six months from the closing of this
offering, that we use our best efforts to register all or a portion of the
Registrable Securities on Form S-3 or any similar short-form registration
statement when use of one or more of these forms becomes available to us.
Subject to certain limitations in the registration agreement between us and
GE Capital Equity Investments, Blackwell Science and a Blackwell affiliate, the
holders of the GE-Blackwell Securities
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<PAGE>
may require, on two occasions at any time six months from the closing of this
offering, that we use our best efforts to register all or part of the
GE-Blackwell Securities for public resale on Form S-1 or any similar long-form
registration, provided that the aggregate offering value of each such long-form
registration includes the lesser of:
- at least 30% of the common stock issuable upon conversion of the initial
87,364 shares of Series E Stock issued to GE Capital Equity Investments,
and
- the GE-Blackwell Securities requested to be registered having a minimum
anticipated offering price of at least $5 million. In addition, subject to
limitations in the registration agreements currently, the holders of the
GE-Blackwell Securities may also require, on four occasions at any time
six months from the closing of this offering, that we use our best efforts
to register all or a portion of the Registrable Securities on Form S-3 or
any similar short-form registration when use of one or more of these forms
becomes available to us.
PIGGYBACK REGISTRATION RIGHTS. If we register any of our common stock,
either for our own account or for the account of other security holders, and the
registration form to be used may be used for the registration of the Registrable
Securities or the GE-Blackwell Securities, the holders of the Registrable
Securities and the GE-Blackwell Securities are entitled to include their shares
of common stock in the registration. A majority of the holders of Registrable
Securities and GE-Blackwell Securities have waived their rights to register
securities in connection with this offering.
In all cases, a holder's right to include shares in a demand or piggyback
registration is subject:
- to the registration priority arrangement reached among HealthGate and the
holders of the Registrable Securities or GE-Blackwell Securities; and
- in an underwritten registration, to the ability of the underwriters to
limit the number of shares included in the offering.
All fees, costs and expenses of all of the registrations will be paid by us,
and all selling expenses (e.g. underwriting discounts, selling commissions and
stock transfer taxes) relating to the Registrable Securities or GE-Blackwell
Securities will be paid by the holders of the securities being registered.
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UNDERWRITING
HealthGate and the underwriters named below have entered into an
underwriting agreement with respect to the shares being offered. Subject to
certain conditions, each underwriter has severally agreed to purchase the number
of shares indicated in the following table at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
prospectus. SG Cowen Securities Corporation, Banc of America Securities LLC and
Volpe Brown Whelan & Company, LLC are the representatives of the underwriters.
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
SG Cowen Securities Corporation..................................................
Banc of America Securities LLC...................................................
Volpe Brown Whelan & Company, LLC................................................
----------
Total........................................................................ 4,600,000
----------
----------
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are conditional and may be terminated at their discretion based on their
assessment of the state of the financial markets. The obligations of the
underwriters may also be terminated upon the occurrence of the other events
specified in the underwriting agreement. The underwriters are severally
committed to purchase all of the common stock being offered by us if any shares
are purchased, other than those covered by the over-allotment option described
below.
The underwriters propose to offer the common stock directly to the public at
the public offering price set forth on the cover page of this prospectus. The
underwriters may offer the common stock to securities dealers at that price less
a concession not in excess of $ per share. Securities dealers may reallow a
concession not in excess of $ per share to other dealers. After the shares of
the common stock are released for sale to the public, the underwriters may vary
the offering price and other selling terms from time to time.
We have granted to the underwriters an option to purchase up to 690,000
additional shares of common stock at the public offering price set forth on the
cover of this prospectus to cover over-allotments, if any. The option is
exercisable for a period of 30 days. If the underwriters exercise their
over-allotment option, the underwriters have severally agreed to purchase shares
in approximately the same proportion as shown in the table above.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, and to contribute to payments
that the underwriters may be required to make in respect of those liabilities.
HealthGate, our directors and officers and existing stockholders who hold an
aggregate of shares, together with the holders of options to
purchase shares of common stock and holders of warrants to purchase
shares of common stock, have agreed with the underwriters that for a period 180
days following the date of this prospectus, without the prior written consent of
SG Cowen Securities Corporation, they will not dispose of or hedge any shares of
common stock or any securities convertible into or exchangeable for common
stock. See "Shares Eligible for Future Sales--Lock-up Agreements."
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids and passive market making in
accordance with Regulation M under the Securities Exchange Act of 1934.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
common stock in the open market after the distribution has been
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completed in order to cover syndicate short positions. Penalty bids permit the
representatives to reclaim a selling concession from a syndicate member when the
common stock originally sold by such syndicate member is purchased in a
syndicate covering transaction to cover syndicate short positions. In passive
market making, market makers in the common stock who are underwriters or
prospective underwriters may, subject to certain limitations, make bids for or
purchases of the common stock until the time, if any, at which a stabilizing bid
is made. These stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
The underwriters have advised us that they do not intend to confirm sales in
excess of 5% of the common stock offered hereby to any account over which they
exercise discretionary authority.
Prior to this offering, there has been no public market for the common
stock. Consequently, the initial public offering price was determined by
negotiations between us and the underwriters. Among the factors considered in
these negotiations were prevailing market conditions, the market capitalizations
and the stages of development of other companies that we and the underwriters
believe to be comparable to us, estimates of our business potential, our results
of operation in recent periods, the present state of our development and other
factors deemed relevant.
We estimate that our out of pocket expenses for this offering will be
approximately $1,605,000.
LEGAL MATTERS
The validity of the authorization and issuance of the securities offered
hereby will be passed upon for HealthGate by Rich, May, Bilodeau & Flaherty,
P.C., Boston, Massachusetts. Stephen M. Kane, a member of Rich, May, Bilodeau &
Flaherty, P.C., is an Assistant Secretary of HealthGate. Certain legal matters
will be passed upon for the underwriters by Shearman & Sterling, New York, New
York.
EXPERTS
The consolidated financial statements of HealthGate Data Corp. as of
December 31, 1997 and 1998 and for each of the three years in the period ended
December 31, 1998, which are included in this prospectus, have been so included
in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
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<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act, and the rules and regulations promulgated thereunder, with
respect to the shares of common stock offered by this prospectus. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement and the
exhibits thereto. Statements contained in this prospectus as to the contents of
any contract or other document that is filed as an exhibit to the registration
statement are not necessarily complete and each such statement is qualified in
all respects by reference to the full text of such contract or document.
You may read and copy all or any portion of the registration statement and
the exhibits at the SEC's public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the SEC located at Seven
World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can request
copies of these documents, upon payment of a duplication fee, by writing to the
SEC. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the SEC's public reference rooms. Also, the SEC maintains a World
Wide Web site on the Internet at http://www.sec.gov that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the SEC.
As a result of this offering, we will become subject to the information and
periodic reporting requirements of the Exchange Act and, in accordance
therewith, will file periodic reports, proxy and information statements and
other information with the SEC. These periodic reports, proxy and information
statements and other information will be available for inspection and copying at
the public reference facilities, regional offices and SEC's Web site referred to
above.
74
<PAGE>
HEALTHGATE DATA CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheet as of December 31, 1997 and 1998 and as of March 31, 1999 (unaudited)........... F-3
Consolidated Statement of Operations for the years ended December 31, 1996, 1997 and 1998 and the three
months ended March 31, 1998 and March 31, 1999 (unaudited)............................................... F-4
Consolidated Statement of Changes in Common Stock and Other Stockholders' Deficit for the years ended
December 31, 1996, 1997 and 1998 and the three months ended March 31, 1999 (unaudited)................... F-5
Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1997 and 1998 and the three
months ended March 31, 1998 and March 31, 1999 (unaudited)............................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of HealthGate Data Corp.
The common stock split described in Note 1 to the financial statements has not
been consummated at May 21, 1999. When it has been consummated, we will be in a
position to furnish the following report:
"In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in common stock and other
stockholders' deficit and of cash flows present fairly, in all material
respects, the financial position of HealthGate Data Corp. and its subsidiary at
December 31, 1997 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above."
PricewaterhouseCoopers LLP
Boston, Massachusetts
April 23, 1999
F-2
<PAGE>
HEALTHGATE DATA CORP.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, MARCH 31, MARCH 31,
---------------------------- -------------- --------------
1997 1998 1999 1999
------------ -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 29,045 $ 960,831 $ 101,724 $ 101,724
Accounts receivable, including receivables from related
parties of $0 and $160,000 at December 31, 1997 and 1998
and $185,000 at March 31, 1999 (unaudited),
respectively, and net of allowance for doubtful accounts
of $3,500 and $20,000 and $26,170 at March 31, 1999
(unaudited), respectively............................... 291,828 362,189 615,637 615,637
Unbilled accounts receivable.............................. -- 12,386 18,427 18,427
Prepaid expenses and other current assets................. 101,966 225,482 317,975 317,975
------------ -------------- -------------- --------------
Total current assets.................................... 422,839 1,560,888 1,053,763 1,053,763
Fixed assets, net........................................... 324,689 806,793 1,033,816 1,033,816
Other assets................................................ 33,015 3,298 131,836 131,836
------------ -------------- -------------- --------------
Total assets............................................ $ 780,543 $ 2,370,979 $ 2,219,415 $ 2,219,415
------------ -------------- -------------- --------------
------------ -------------- -------------- --------------
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
COMMON STOCK AND OTHER STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of capital lease obligation............... $ 85,541 $ 213,713 $ 266,069 $ 266,069
Accounts payable.......................................... 610,495 572,687 1,190,050 1,190,050
Accrued payroll........................................... 50,107 201,254 285,560 285,560
Other accrued expenses.................................... 81,349 228,880 284,414 284,414
Deferred revenue.......................................... 462,029 344,820 838,166 838,166
------------ -------------- -------------- --------------
Total current liabilities............................... 1,289,521 1,561,354 2,864,259 2,864,259
Long-term portion of capital lease obligation............... 16,927 226,401 244,803 244,803
Note payable to related party............................... -- 2,000,000 2,000,000 2,000,000
Long-term note payable...................................... -- 1,429,087 1,453,395 1,453,395
------------ -------------- -------------- --------------
Total liabilities....................................... 1,306,448 5,216,842 6,562,457 6,562,457
------------ -------------- -------------- --------------
Redeemable convertible preferred stock (Note 4)............. 6,294,602 6,889,431 7,038,138 --
------------ -------------- -------------- --------------
Common stock and other stockholders' deficit:
Common stock, $.01 par value;
Authorized: 20,000,000 shares
Issued and outstanding: 5,228,515 and 5,234,334 shares
at December 31, 1997 and 1998, respectively and
5,234,425 shares at March 31, 1999 (unaudited) and
10,610,910 shares at March 31, 1999 pro forma
(unaudited)........................................... 52,285 52,343 52,344 106,109
Additional paid-in capital.................................. 116,354 673,867 2,653,930 9,638,303
Accumulated deficit......................................... (6,989,146) (10,461,504) (12,230,404) (12,230,404)
Deferred compensation....................................... -- -- (1,857,050) (1,857,050)
------------ -------------- -------------- --------------
Total common stock and other stockholders' deficit...... (6,820,507) (9,735,294) (11,381,180) (4,343,042)
------------ -------------- -------------- --------------
Commitments and contingencies (Note 9)......................
------------ -------------- -------------- --------------
Total liabilities, redeemable convertible preferred
stock and common stock and other stockholders'
deficit............................................... $ 780,543 $ 2,370,979 $ 2,219,415 $ 2,219,415
------------ -------------- -------------- --------------
------------ -------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
HEALTHGATE DATA CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
------------- ------------- ------------- ------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue, including revenue from
related parties of $0, $240,400, and
$1,070,500, in 1996, 1997 and 1998,
and $250,300 and $218,500 for the
three months ended March 31, 1998
and 1999, respectively.............. $ 408,244 $ 1,284,636 $ 2,434,124 $ 625,865 $ 614,805
------------- ------------- ------------- ------------- -------------
Cost and expenses:
Cost of revenue..................... 491,550 911,765 1,181,012 254,662 362,844
Research and development............ 980,373 890,577 1,450,106 230,870 752,460
Sales and marketing................. 1,080,187 1,496,356 1,414,179 300,659 552,416
General and administrative.......... 567,822 521,323 929,479 157,580 409,232
------------- ------------- ------------- ------------- -------------
Total costs and expenses.......... 3,119,932 3,820,021 4,974,776 943,771 2,076,952
------------- ------------- ------------- ------------- -------------
Loss from operations................ (2,711,688) (2,535,385) (2,540,652) (317,906) (1,462,147)
------------- ------------- ------------- ------------- -------------
Interest expense, net................. (14,497) (5,773) (327,100) (17,420) (158,046)
Other expense......................... -- -- (9,777) -- --
------------- ------------- ------------- ------------- -------------
Net loss.......................... (2,726,185) (2,541,158) (2,877,529) (335,326) (1,620,193)
Preferred stock dividends and
accretion of preferred stock to
redemption value.................... 263,641 539,644 594,829 148,707 148,707
------------- ------------- ------------- ------------- -------------
Net loss attributable to common
stockholders.................... $ (2,989,826) $ (3,080,802) $ (3,472,358) $ (484,033) $ (1,768,900)
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Basic and diluted net loss per share
attributable to common
stockholders........................ $ (.57) $ (.59) $ (.66) $ (.09) $ (.34)
Shares used in computing basic and
diluted net loss per share
attributable to common
stockholders........................ 5,228,460 5,228,515 5,233,247 5,228,515 5,234,368
Unaudited pro forma basic and diluted
net loss per share.................. $ (.27) $ (.15)
Shares used in computing unaudited pro
forma basic and diluted net loss per
share............................... 10,609,732 10,610,853
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
HEALTHGATE DATA CORP.
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCK AND
OTHER STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
TOTAL COMMON
COMMON STOCK ADDITIONAL STOCK AND OTHER
----------------------- PAID-IN ACCUMULATED DEFERRED STOCKHOLDERS'
SHARES PAR VALUE CAPITAL DEFICIT COMPENSATION DEFICIT
---------- ----------- ----------- ------------- ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995............. 5,228,287 $ 52,283 $ 116,204 $ (918,518) $ (6,524) $ (756,555)
Compensation relating to grants of
stock options...................... 6,524 6,524
Exercise of common stock options..... 228 2 150 152
Accrual of cumulative dividends on
redeemable convertible preferred
stock and accretion to redemption
value.............................. (263,641) (263,641)
Net loss............................. (2,726,185) (2,726,185)
---------- ----------- ----------- ------------- ------------ -----------------
Balance, December 31, 1996............. 5,228,515 52,285 116,354 (3,908,344) -- (3,739,705)
Accrual of cumulative dividends on
redeemable convertible preferred
stock and accretion to redemption
value.............................. (539,644) (539,644)
Net loss............................. (2,541,158) (2,541,158)
---------- ----------- ----------- ------------- ------------ -----------------
Balance, December 31, 1997............. 5,228,515 52,285 116,354 (6,989,146) -- (6,820,507)
Exercise of common stock options..... 5,819 58 3,513 3,571
Issuance of common stock warrants.... 554,000 554,000
Accrual of cumulative dividends on
redeemable convertible preferred
stock and accretion to redemption
value.............................. (594,829) (594,829)
Net loss............................. (2,877,529) (2,877,529)
---------- ----------- ----------- ------------- ------------ -----------------
Balance, December 31, 1998............. 5,234,334 52,343 673,867 (10,461,504) -- (9,735,294)
Deferred compensation relating to
grants of stock options
(unaudited)........................ 1,980,009 (1,980,009) --
Compensation relating to grants of
stock options (unaudited).......... 122,959 122,959
Exercise of common stock options
(unaudited)........................ 91 1 54 55
Accrual of cumulative dividends on
redeemable convertible preferred
stock and accretion to redemption
value (unaudited).................. (148,707) (148,707)
Net loss (unaudited)................. (1,620,193) (1,620,193)
---------- ----------- ----------- ------------- ------------ -----------------
Balance, March 31, 1999 (unaudited).... 5,234,425 $ 52,344 $ 2,653,930 $ (12,230,404) $(1,857,050) $ (11,381,180)
---------- ----------- ----------- ------------- ------------ -----------------
---------- ----------- ----------- ------------- ------------ -----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
HEALTHGATE DATA CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
Cash flows from operating activities:
Net loss....................................... $ (2,726,185) $ (2,541,158) $ (2,877,529) $ (335,326) $ (1,620,193)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 197,900 356,791 416,897 81,361 129,193
Loss on disposal of fixed assets............. -- -- 9,777 --
Compensation expense related to stock
options.................................... 6,524 -- -- -- 122,959
Changes in assets and liabilities:
Accounts receivable........................ (63,144) (228,010) (70,361) 203,257 (253,448)
Unbilled accounts receivable............... -- -- (12,386) (16,622) (6,041)
Prepaid expenses and other current
assets................................... (24,684) (47,349) (123,516) (76,294) (92,493)
Other assets............................... 1,870 (1,357) 29,717 3,964 (128,538)
Accounts payable........................... 321,066 186,801 (37,808) 119,690 617,363
Accrued payroll............................ (12,895) 35,091 151,147 (12,591) 84,306
Other accrued expenses..................... (1,433) 36,722 147,531 53,304 55,534
Deferred revenue........................... 16,603 445,426 (117,209) 90,453 493,346
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) operating
activities............................. (2,284,378) (1,757,043) (2,483,740) 111,196 (598,012)
------------- ------------- ------------- ------------- -------------
Cash flows from investing activities:
Purchases of fixed assets...................... (152,824) (124,801) (277,538) (74,241) (197,358)
------------- ------------- ------------- ------------- -------------
Cash flows from financing activities:
Payments of capital lease obligations.......... (165,793) (237,190) (239,785) (38,779) (63,792)
Proceeds from issuance of preferred and common
stock, net of issuance costs................. 3,653,901 992,353 3,571 -- 55
Proceeds from notes payable and warrants (Note
3)........................................... -- -- 3,929,278 1,929,278 --
------------- ------------- ------------- ------------- -------------
Net cash provided by financing
activities............................. 3,488,108 755,163 3,693,064 1,890,499 (63,737)
------------- ------------- ------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents.................................... 1,050,906 (1,126,681) 931,786 1,927,454 (859,107)
Cash and cash equivalents, beginning of year..... 104,820 1,155,726 29,045 29,045 960,831
------------- ------------- ------------- ------------- -------------
Cash and cash equivalents, end of year........... $ 1,155,726 $ 29,045 $ 960,831 $ 1,956,499 $ 101,724
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the years ended December 31, 1996, 1997 and 1998, HealthGate paid
approximately $24,000, $28,000 and $242,000 and for the three months ended March
31, 1998 and 1999, $17,000 and $99,000, respectively, for interest.
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
During the years ended December 31, 1996, 1997 and 1998, HealthGate entered into
capital leases totaling approximately $87,000, $71,000 and $577,000 and for the
three months ended March 31, 1998 and 1999, $49,000 and $135,000, respectively,
for certain computer equipment.
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
HEALTHGATE DATA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
HealthGate Data Corp. ("HealthGate") is an Internet provider of healthcare
information designed to help physicians and other healthcare professionals,
patients and health-conscious consumers make better-informed healthcare
decisions. HealthGate was incorporated in the State of Delaware on February 8,
1994.
HealthGate is subject to risks and uncertainties common to growing
technology-based companies, including rapid technological developments, reliance
on continued development and acceptance of the Internet, intense competition and
a limited operating history.
The Company intends to declare a 4.564 for 1 stock split in the form of a
stock dividend, subject to shareholder approval. All share and per share amounts
presented have been restated to reflect the stock split.
Significant accounting polices followed in the preparation of the financial
statements are as follows:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of HealthGate and
its wholly-owned subsidiary, HealthGate Europe Limited. All material
intercompany balances and transactions have been eliminated.
TRANSLATION OF FOREIGN CURRENCIES
The functional currency of HealthGate's foreign subsidiary is the local
currency. Adjustments resulting from the translation of the financial statements
of HealthGate's subsidiary into U.S. dollars, and foreign currency transaction
gains and losses included in the results of operations, have not been
significant.
CASH AND CASH EQUIVALENTS
HealthGate considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. HealthGate
invests its excess cash in money market funds backed by U.S. Government
securities and U.S. Treasury securities which are subject to minimal credit and
market risk. HealthGate's cash equivalents are classified as available for sale
and recorded at amortized cost, which approximates fair value.
REVENUE RECOGNITION
HealthGate derives revenue primarily from user subscriptions and transaction
based fees, Web site development and hosting arrangements, content syndication
arrangements and the sale of advertising and sponsorships under short-term
contracts. Revenue from user subscriptions is recognized ratably over the
subscription period, and revenue from usage fees is recognized when the service
is provided. Revenue from Web site development and hosting arrangements and
content syndication arrangements is recognized ratably over the terms of the
underlying agreements, which generally range from one to two years.
Advertising revenue is derived principally from short-term advertising
contracts, in which HealthGate typically guarantees a minimum number of
impressions to be delivered to users over a
F-7
<PAGE>
HEALTHGATE DATA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
specified period of time for a fixed fee. Advertising revenue is recognized in
the period in which the advertisement is displayed, at the lesser of the ratio
of impressions delivered over total guaranteed impressions or a straight line
basis over the term of the contract, provided that no significant HealthGate
obligations remain. To the extent that minimum guaranteed impressions are not
met, HealthGate defers recognition of the corresponding revenue until the
guaranteed impressions are delivered. Sponsorship revenue is recognized ratably
over the terms of the applicable agreements, which generally range from one to
six months.
Advertising and sponsorship revenue also includes barter revenue, which
represents an exchange by HealthGate of advertising space on HealthGate's Web
sites for reciprocal advertising space on other Web sites. Revenue from
advertising barter transactions is recognized during the period in which the
advertisements are displayed by HealthGate. Barter transactions are recorded at
the estimated fair value of the advertisements provided, unless the fair value
of the advertisments received is more evident. Barter expenses are recognized
when HealthGate's advertisements are run on the reciprocal Web sites, which is
typically in the same period as when the advertisements are run on HealthGate's
Web sites. Barter expenses are included in sales and marketing expenses. During
the years ended December 31, 1996, 1997 and 1998, revenue from barter
transactions was $125,000, $607,196 and $435,889, respectively.
Revenue from a research arrangement was recognized pursuant to the agreement
as the related work was performed. During the year ended December 31, 1996,
total revenue recognized and costs incurred under this arrangement were $87,171
and $81,442, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of HealthGate's financial instruments, which include
cash equivalents, accounts receivable, accounts payable, accrued expenses and
notes payable, approximate their fair values at December 31, 1997 and 1998.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments which potentially expose HealthGate to concentrations
of credit risk consist primarily of trade accounts receivable. To minimize risk,
ongoing credit evaluations of customers' financial condition are performed,
although collateral generally is not required. At December 31, 1997, one
customer accounted for 63% of gross accounts receivable. At December 31, 1998,
two customers accounted for 20% and 11% of gross accounts receivable, and a
related party accounted for 42% of gross accounts receivable. For the year ended
December 31, 1996, two customers accounted for 15% and 11% of total revenue, and
revenue from a research arrangement accounted for 21% of total revenue. For the
year ended December 31, 1997, one customer accounted for 19% of total revenue,
and a related party accounted for 18% of total revenue. For the year ended
December 31, 1998, one customer accounted for 18% of total revenue and a related
party accounted for 44% of total revenue.
RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
Costs incurred in the research and development of HealthGate's products are
expensed as incurred, except for certain software development costs. Costs
associated with the development of computer software are expensed prior to the
establishment of technological feasibility (as defined by Statement of Financial
Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer
F-8
<PAGE>
HEALTHGATE DATA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Software to be Sold, Leased or Otherwise Marketed") and capitalized thereafter
when material to HealthGate's financial position or results of operations. Costs
eligible for capitalization have been insignificant to date.
FIXED ASSETS
Fixed assets are recorded at cost and depreciated over their estimated
useful lives, generally one to three years, using the straight-line method.
Fixed assets held under capital leases which involve a transfer of ownership are
amortized over the estimated useful life of the asset. Other fixed assets held
under capital leases are amortized over the shorter of the lease term or the
estimated useful life of the related asset. Repairs and maintenance costs are
expensed as incurred.
ACCOUNTING FOR STOCK-BASED COMPENSATION
HealthGate accounts for stock-based awards to employees using the intrinsic
value method as prescribed by Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, no compensation expense is recorded for options issued to employees
in fixed amounts and with fixed exercise prices at least equal to the fair
market value of HealthGate's common stock at the date of grant. HealthGate has
adopted the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," for disclosure purposes only (Note 5). All stock-based awards to
non-employees are accounted for at their fair value in accordance with SFAS No.
123 and related interpretations.
ADVERTISING COSTS
Advertising costs are charged to operations as incurred. Advertising costs
were approximately $410,000, $790,000 and $456,000 in the years ended December
31, 1996, 1997 and 1998, respectively, of which approximately $115,000, $617,000
and $418,000, respectively, related to barter transactions.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
UNAUDITED PRO FORMA BALANCE SHEET
Upon the closing of HealthGate's anticipated initial public offering, all
outstanding shares of redeemable convertible preferred stock (Note 4) will
automatically convert into 5,376,485 shares of common stock. This conversion has
been reflected in the unaudited pro forma balance sheet as of March 31, 1999.
UNAUDITED INTERIM FINANCIAL DATA
The interim financial data as of March 31, 1999 and for the three months
ended March 31, 1998 and 1999 have been derived from unaudited financial
statements of HealthGate. Management believes
F-9
<PAGE>
HEALTHGATE DATA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
HealthGate's unaudited financial statements have been prepared on the same basis
as the audited financial statements and include all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
financial position and results of operations in such periods. Results for the
three months ended March 31, 1998 and March 31, 1999 have not been audited and
are not necessarily indicative of results to be expected for the full fiscal
year.
ACTUAL AND UNAUDITED PRO FORMA NET LOSS PER SHARE
Net loss per share is computed in accordance with SFAS No. 128, "Earnings
Per Share." Basic net loss per share is computed by dividing net loss
attributable to common stockholders by the weighted average number of shares of
common stock outstanding. Diluted net loss per share does not differ from basic
net loss per share since potential common shares from conversion of preferred
stock and exercise of stock options and warrants are anti-dilutive for all
periods presented. Unaudited pro forma basic and diluted net loss per share have
been calculated assuming the conversion of all outstanding shares of preferred
stock into common shares, as if the shares had converted immediately upon their
issuance.
COMPREHENSIVE INCOME
HealthGate adopted SFAS No. 130, "Reporting Comprehensive Income," effective
January 1, 1998. This statement requires a full set of general purpose financial
statements to be expanded to include the reporting of "comprehensive income."
Comprehensive income is comprised of two components, net income and other
comprehensive income. During the years ended December 31, 1996, 1997 and 1998,
HealthGate had no items qualifying as other comprehensive income; accordingly,
the adoption of SFAS No. 130 had no impact on HealthGate's financial statements.
SEGMENT REPORTING
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise." This statement changes the way
public business enterprises report segment information, including financial and
descriptive information about their selected segment information in interim and
annual financial statements. Under SFAS No. 131, operating segments are defined
as revenue-producing components of the enterprise which are generally used
internally for evaluating segment performance. SFAS No. 131 is effective for
HealthGate's fiscal year ended December 31, 1998 and had no effect on
HealthGate's financial position or results of operations. HealthGate operates in
one segment, which is providing healthcare and related information to
institutions and individuals through the Internet.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The new standard establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. HealthGate does
not expect SFAS No. 133 to have a material effect on its financial position or
results of operations.
F-10
<PAGE>
HEALTHGATE DATA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In February 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SoP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SoP 98-1 establishes the
accounting for costs of software products developed or purchased for internal
use, including when such costs should be capitalized. SoP 98-1 will be effective
for HealthGate beginning in fiscal 1999, and HealthGate does not expect adoption
of this SoP to have a material effect on its financial position or results of
operations.
In April 1998, the AcSEC issued SoP 98-5, "Reporting on the Costs of
Start-Up Activities." Start-up activities are defined broadly as those one-time
activities related to the opening of a new facility, introducing a new product
or service, conducting business in a new territory, conducting business with a
new class of customer, commencing some new operation or organizing a new entity.
SoP 98-5 requires that the cost of start-up activities be expensed as incurred.
SoP 98-5 is effective for HealthGate beginning in fiscal 1999, and HealthGate
does not expect adoption of this SoP to have a material effect on its financial
position or results of operations.
2. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
USEFUL LIVES -------------------------- -------------
IN YEARS 1997 1998 1999
--------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Computer equipment and software....... 3 $ 295,384 $ 473,842 $ 542,353
Office equipment and fixtures......... 3 80,592 127,349 256,196
Computer equipment under capital
lease............................... 1-3 549,228 1,126,659 1,261,209
------------ ------------ -------------
925,204 1,727,850 2,059,758
------------ ------------ -------------
Less--Accumulated depreciation and
amortization........................ (600,515) (921,057) (1,025,942)
------------ ------------ -------------
$ 324,689 $ 806,793 $ 1,033,816
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
Depreciation and amortization expense on fixed assets was $197,900, $356,791
and $363,088 in 1996, 1997 and 1998, and $81,361 and $104,885 for the three
months ended March 31, 1998 and 1999, respectively, of which $132,055, $248,217
and $186,475 and $48,004 and $52,543 for the three months ended March 31, 1998
and 1999, respectively, related to amortization of assets held under capital
lease. Accumulated amortization on assets under capital lease was $417,961 and
$604,436, at December 31, 1997 and 1998, and $656,979 at March 31, 1999,
respectively.
3. NOTES PAYABLE
On March 26, 1998, HealthGate issued a $2,000,000 subordinated note payable
(the "Note") with detachable warrants, for net cash proceeds of approximately
$1,929,000. The Note bears interest at an annual rate of 13.0%, payable monthly.
The principal amount is due on March 26, 2003, but may be prepaid without
penalty. The Note is secured by substantially all of HealthGate's tangible and
intangible assets, and limits HealthGate's ability to issue additional debt.
F-11
<PAGE>
HEALTHGATE DATA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. NOTES PAYABLE (CONTINUED)
In connection with the Note, HealthGate issued warrants to purchase 392,504
shares of its common stock at an exercise price per share of $0.00004. Further,
on December 31, 1998, HealthGate issued warrants to purchase an additional
132,128 shares at an exercise price of $0.00004 per share, as HealthGate did not
achieve a minimum 1998 revenue target defined in the agreement. Under the terms
of the Note agreement, HealthGate will be required to issue warrants to purchase
an additional 205,380 shares, 211,998 shares and 218,844 shares at an exercise
price of $0.00004 per share if the Note is outstanding on March 26, 2000, 2001
and 2002, respectively. The number of shares and exercise price of the issued
and contingently issuable warrants are to be adjusted for certain dilutive and
anti-dilutive events. The warrants are exercisable for a period of ten years
from March 26, 1998. The terms of the warrant agreement place certain
restrictions on the number of options, warrants and other convertible securities
which HealthGate may issue. These restrictions will expire upon an initial
public offering of HealthGate's common stock. HealthGate ascribed a value of
$261,000 to the warrants issued in March 1998 and $293,000 to the warrants
issued in December 1998, based on the fair value at the time of issuance. The
amount which was ascribed to the warrants was recorded as additional paid-in
capital and a discount from the face value of the Note. The discount is being
amortized to interest expense over the life of the note using the effective
interest method.
On September 29, 1998, the Company issued a convertible note (the
"Convertible Note") in the principal amount of $2,000,000 to an existing
preferred stockholder. The Convertible Note bore interest at an annual rate of
12%, and was due on March 31, 1999. In April 1999, the Convertible Note was
converted into 797,463 shares of the HealthGate's Series E redeemable
convertible preferred stock (Note 4). Since the Convertible Note was converted
into preferred stock in April 1999, it has been classified as long-term in
HealthGate's balance sheet at December 31, 1998.
F-12
<PAGE>
HEALTHGATE DATA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. REDEEMABLE CONVERTIBLE PREFERRED STOCK
A summary of redeemable convertible preferred stock activity for the years
ended December 31, 1996, 1997 and 1998 and the three months ended March 31, 1999
is as follows:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D
----------------- ------------------- ------------------- ------------------- TOTAL
CARRYING CARRYING CARRYING CARRYING CARRYING
SHARES VALUE SHARES VALUE SHARES VALUE SHARES VALUE VALUE
------ -------- ------ ---------- ------ ---------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995......... 1,000 $454,310 250 $ 390,905 -- $ -- -- $ -- $ 845,215
Issuance of Series B............. 750 1,200,000 1,200,000
Issuance of Series C, net of
issuance costs of $22,009...... 1,000 977,991 977,991
Issuance of Series D, net of
issuance costs of $24,242...... 1,000 1,475,758 1,475,758
Accrual of cumulative dividends
and accretion to redemption
value.......................... 70,265 136,971 43,501 12,904 263,641
------ -------- ------ ---------- ------ ---------- ------ ---------- ----------
Balance, December 31, 1996......... 1,000 524,575 1,000 1,727,876 1,000 1,021,492 1,000 1,488,662 4,762,605
Issuance of Series D, net of
issuance costs of $8,147....... 667 992,353 992,353
Accrual of cumulative dividends
and accretion to redemption
value.......................... 70,262 163,637 104,402 201,343 539,644
------ -------- ------ ---------- ------ ---------- ------ ---------- ----------
Balance, December 31, 1997......... 1,000 594,837 1,000 1,891,513 1,000 1,125,894 1,667 2,682,358 6,294,602
Accrual of cumulative dividends
and accretion to redemption
value.......................... 70,262 163,637 104,402 256,528 594,829
------ -------- ------ ---------- ------ ---------- ------ ---------- ----------
Balance, December 31, 1998......... 1,000 665,099 1,000 2,055,150 1,000 1,230,296 1,667 2,938,886 6,889,431
------ -------- ------ ---------- ------ ---------- ------ ---------- ----------
Accrual of cumulative dividends
and accretion to redemption
value (unaudited).............. 17,566 40,909 26,100 64,132 148,707
------ -------- ------ ---------- ------ ---------- ------ ---------- ----------
Balance at March 31, 1999
(unaudited).................... 1,000 $682,665 1,000 $2,096,059 1,000 $1,256,396 1,667 $3,003,018 $7,038,138
------ -------- ------ ---------- ------ ---------- ------ ---------- ----------
------ -------- ------ ---------- ------ ---------- ------ ---------- ----------
</TABLE>
CONVERSION
Each preferred share is convertible into common stock at the option of the
preferred stockholder or automatically upon the closing of an initial public
offering of HealthGate's common stock in which proceeds from the public equal or
exceed $10,000,000. The number of common shares to which a holder of the
preferred stock is entitled upon conversion is based upon the conversion rates
defined by HealthGate's Amended and Restated Certificate of Incorporation,
(approximately 1,086.59 for 1, 1,822.87 for 1, 632.80 for 1 and 917.45 for 1 for
holders of Series A, B, C and D preferred stock, respectively, at December 31,
1998). At December 31, 1998, the outstanding preferred stock is convertible into
a total of 5,376,485 common shares. The conversion rates are to be adjusted for
certain dilutive and anti-dilutive events. HealthGate has reserved 1,391,400,
1,822,900, 632,800 and 1,529,400 shares of common stock for the conversion of
Series A, B, C and D preferred stock, respectively.
F-13
<PAGE>
HEALTHGATE DATA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
LIQUIDATION, DISSOLUTION OR WINDING UP OF HEALTHGATE
In the event of any liquidation, dissolution or winding up of HealthGate,
the holders of Series A, B, C and D preferred stock are entitled to receive, on
a pro-rata basis, $500, $1,600, $1,000 and $1,500 per share, respectively, plus
all accrued and unpaid dividends.
VOTING, REGISTRATION AND OTHER RIGHTS
The holders of the preferred stock are entitled to vote, together with the
holders of common stock, on all matters submitted to stockholders for a vote.
Each preferred stockholder is entitled to the number of votes equal to the
number of shares of common stock into which each Series A, B, C and D share is
convertible at the time of such vote.
DIVIDENDS
The holders of the Series A, B, C and D preferred stock are entitled to
receive cumulative annual dividends in the amount of $50, $160, $100 and $150
per share, respectively, whether or not declared by the Board of Directors.
These dividends are payable upon liquidation, dissolution or winding-up of
HealthGate, or upon redemption of the respective preferred stock.
REDEMPTION
On each of the fifth, sixth and seventh anniversaries of the applicable
series closing date, HealthGate is required to redeem 33-1/3 percent of the
Series A, B, C and D preferred stock at a redemption price equal to $500,
$1,600, $1,000 and $1,500 per share, respectively, plus accrued and unpaid
dividends through the redemption date.
Required redemption amounts for each of the five years following December
31, 1998, for the preferred stock, excluding any cumulative and unpaid
dividends, are as follows:
<TABLE>
<CAPTION>
REDEMPTION
AMOUNT
------------
<S> <C>
1999............................................................................ $ --
2000............................................................................ 700,000
2001............................................................................ 1,866,833
2002............................................................................ 1,866,834
2003............................................................................ 1,166,833
------------
$ 5,600,500
------------
------------
</TABLE>
SUBSEQUENT ISSUANCE OF PREFERRED STOCK
In April 1999, HealthGate issued 546,028 shares of newly authorized Series E
redeemable convertible preferred stock for gross proceeds of $6,250,000. In
connection with the issuance of the Series E preferred stock, HealthGate paid
$300,000 of fees to a placement agent, and will issue the placement agent
warrants to purchase 24,919 shares of HealthGate common stock at an exercise
price of $2.51 per share. The Company has ascribed a value to the warrants of
$200,000. The placement fee and warrant value will be reflected as a reduction
of the proceeds from the Series E preferred stock
F-14
<PAGE>
HEALTHGATE DATA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
issuance. An additional 174,729 shares of Series E preferred stock were issued
upon conversion of a convertible note (Note 3). The Series E preferred stock
ranks senior in liquidation to other classes of preferred stock, and has certain
veto rights. The Series E preferred stock accrues cumulative annual dividends at
7% of its liquidation value (initially $8,250,000). The dividends are compounded
annually and, unless paid, are added to the Series E preferred stock liquidation
value. The Series E preferred stock is convertible into a number of shares of
common stock determined by dividing the liquidation value by a conversion price
per share of $2.51. The conversion price is to be adjusted for certain dilutive
events.
Each share of Series E preferred stock is convertible into 4.564 shares of
common stock, which represents a discount from the fair value of common stock on
the date of the Series E issuance. The value attributable to this conversion
right represents an incremental yield, or a beneficial conversion feature, which
will be recognized as a return to the preferred stockholders. This amount, equal
to the net proceeds from the Series E offering of $7,750,000, which includes
conversion of the convertible note, will be recorded as accretion of preferred
stock to redemption value in the consolidated statement of operations in the
period the Series E preferred stock was issued, and represents a non-cash charge
in the determination of net loss attributable to common stockholders.
5. COMMON STOCK AND OTHER STOCKHOLDERS' DEFICIT
COMMON STOCK
Each share of common stock entitles the holder to one vote on all matters
submitted to a vote of HealthGate's stockholders. Common stockholders are
entitled to receive dividends, if any, as may be declared by the Board of
Directors, subject to any preferential dividend rights of the preferred
stockholders.
A 50-for-1 split of HealthGate's common stock became effective on January
23, 1998. All shares of common stock, options, and warrants and per share
amounts included in the accompanying financial statements have been adjusted to
give retroactive effect to the stock split for all periods presented.
STOCK OPTION PLANS
In June 1994, HealthGate adopted the HealthGate Data Corp. 1994 Stock Option
Plan (the "1994 Plan") which provides for the granting of both incentive stock
options and nonqualified options to employees, directors and consultants. The
1994 Plan, as amended, allows for a maximum of 2,966,600 options to purchase
shares of common stock to be issued prior to December 2004. The exercise price
of any incentive stock option granted under the 1994 Plan shall not be less than
the fair market value of the stock on the date of grant, as determined in good
faith by the Board of Directors, or less than 110% of the fair value in the case
of optionees holding more than 10% of the total combined voting power of all
classes of HealthGate's stock. Options granted under the 1994 Plan are
exercisable for a period of not longer than ten years from the date of grant, or
five years in the case of optionees holding more than 10% of the combined voting
power of all classes of HealthGate's stock.
HealthGate applies APB 25 and related interpretations in accounting for
employee and director options granted under the 1994 Plan. Since inception
(February 8, 1994) through December 31, 1998, no compensation expense has been
recognized for options granted to employees under this plan. During 1996 and
1997, HealthGate granted options to purchase 34,230 and 11,410 shares of common
F-15
<PAGE>
HEALTHGATE DATA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMON STOCK AND OTHER STOCKHOLDERS' DEFICIT (CONTINUED)
stock, respectively, to a member of its Board of Directors for consulting
services rendered. The options vested during 1997 and 1998 as the consulting
services were provided. The compensation expense related to these options was
not significant. Had compensation cost attributable to the 1994 Plan and other
options been determined based on the fair value of the options at the grant
date, consistent with the provisions of FAS 123, HealthGate's net loss and net
loss per share would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Net loss
As reported.......................................... $(2,726,185) $(2,541,158) $(2,877,529)
Pro forma............................................ (2,749,727) (2,580,033) (2,904,547)
Basic and diluted net loss per share attributable
to common stockholders
As reported.......................................... $ (.57) $ (.59) $ (.66)
Pro forma............................................ (.58) (.60) (.67)
</TABLE>
Because the determination of the fair value of all options granted after
HealthGate becomes a public entity will include an expected volatility factor,
additional option grants are expected to be made subsequent to December 31,
1998, and most options vest over several years, the above pro forma effects are
not necessarily indicative of the pro forma effects on future years.
Under SFAS No. 123, the fair value of each employee option grant is
estimated on the date of grant using the Black-Scholes option pricing model to
apply the minimum value method with the following weighted-average assumptions
used for grants made during the years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Expected option term (years).................................................. 4 4 4
Risk-free interest rate....................................................... 5.70% 6.16% 5.29%
Expected volatility........................................................... 0.0% 0.0% 0.0%
Dividend yield................................................................ 0.0% 0.0% 0.0%
</TABLE>
F-16
<PAGE>
HEALTHGATE DATA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMON STOCK AND OTHER STOCKHOLDERS' DEFICIT (CONTINUED)
A summary of the status of HealthGate's options as of December 31, 1996,
1997 and 1998 and changes during the years then ended are presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1996 1997 1998
---------------------- ------------------------ ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- ----------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year.......................... 682,774 $ .20 1,060,445 $ .50 1,508,173 $ .39
Granted......................... 604,730 1.01 703,997 .41 951,594 1.27
Exercised....................... (228) .61 -- -- (5,819) .61
Canceled........................ (226,831) .94 (256,269) .89 (481,388) .27
--------- ----------- --------- ----- --------- -----
Outstanding at end of year...... 1,060,445 $ .50 1,508,173 $ .39 1,972,560 $ .84
--------- ----------- --------- ----- --------- -----
--------- ----------- --------- ----- --------- -----
Options available for grant at
end of year................... 562,285 312,862 100,979
--------- --------- ---------
--------- --------- ---------
Weighted-average fair value of
options granted during the
year.......................... $ .20 $ .09 $ .04
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ---------------------------------- ----------- ------------------- ------------------- ---------- -------------------
under $.22........................ 258,322 3.58 $ .02 255,470 $ .02
$.22--$.44........................ 602,448 4.01 .41 372,760 .41
$.44--$.66........................ 306,244 4.10 .65 107,966 .63
$.66--$.88........................ -- -- -- -- --
$.88--$1.10....................... 189,406 3.99 1.01 179,119 1.01
$1.63............................. 616,140 4.06 1.63 188,265 1.63
----------- ----------
1,972,560 1,103,580
----------- ----------
----------- ----------
</TABLE>
DEFERRED COMPENSATION
During the three months ended March 31, 1999, HealthGate granted stock
options to purchase 237,328 shares of its common stock with an exercise price of
$.77 per share. HealthGate recorded compensation expense and deferred
compensation relating to these options totaling approximately $123,000 and
$1,980,000, respectively, representing the differences between the estimated
fair market value of the common stock on the date of grant and the exercise
price. Compensation related to options which vest over three years was recorded
as a component of stockholders' deficit and is being amortized over the vesting
periods of the related options.
F-17
<PAGE>
HEALTHGATE DATA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
<S> <C> <C>
1997 1998
------------ ------------
Deferred tax assets:
Net operating loss carryforwards.................................................... $ 2,303,707 $ 3,506,205
Other............................................................................... 247,946 259,980
------------ ------------
Deferred tax assets................................................................... 2,551,653 3,766,185
------------ ------------
Deferred tax asset valuation allowance................................................ (2,551,653) (3,766,185)
------------ ------------
$ -- $ --
------------ ------------
------------ ------------
</TABLE>
Realization of total deferred tax assets is dependent upon the generation of
future taxable income. HealthGate has provided a valuation allowance for the
full amount of its deferred tax assets, since realization of these future
benefits is not sufficiently assured.
Income taxes computed using the federal statutory income tax rate differs
from HealthGate's effective tax primarily due to the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
<S> <C> <C> <C>
1996 1997 1998
----------- ----------- -------------
Income tax benefit at U.S. federal statutory tax rate.................... $ (954,165) $ (889,405) $ (1,007,135)
State taxes, net of federal tax impact................................... (166,591) (152,211) (170,165)
Other.................................................................... (5,688) (32,083) (37,232)
Change in valuation allowance............................................ 1,126,444 1,073,699 1,214,532
----------- ----------- -------------
Provision for income taxes............................................. $ -- $ -- $ --
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
At December 31, 1998, HealthGate has net operating loss carryforwards and
research and development tax credit carryforwards of approximately $8,492,000
and $82,000, respectively, available for federal and foreign purposes to reduce
future taxable income and future tax liabilities, respectively. If not utilized,
these carryforwards will expire at various dates ranging from 2010 to 2018.
Under the provisions of the Internal Revenue Code, certain substantial changes
in HealthGate's ownership may have limited, or may limit in the future, the
amount of net operating loss and research and development tax credit
carryforwards which could be used annually to offset future taxable income and
income tax liability. The amount of any annual limitation is determined based
upon HealthGate's value prior to an ownership change.
7. 401(K) PLAN
During 1996, HealthGate established a defined contribution savings plan
under Section 401(k) of the Internal Revenue Code. This plan covers
substantially all employees who meet minimum age and service requirements and
allows participants to defer a portion of their annual compensation on a pre-tax
basis. Company contributions to the plan may be made at the discretion of the
Board of Directors. There were no contributions made to the plan by HealthGate
during the years ended December 31, 1996, 1997 or 1998.
F-18
<PAGE>
HEALTHGATE DATA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RELATED PARTY TRANSACTIONS
Through December 1998, a stockholder of HealthGate was a partial owner of
the building in which HealthGate leases office space. HealthGate incurred rental
costs of approximately $58,000, $84,000 and $89,000 under this lease agreement
during the years ended December 31, 1996, 1997 and 1998, respectively.
In connection with the Series B preferred stock purchase agreement,
HealthGate was required to use the services of the sole Series B investor for
certain consulting work. During 1996, HealthGate incurred consulting costs with
this investor totaling approximately $203,000. HealthGate also leases certain
computer equipment from this investor under a noncancelable capital lease
arrangement. Payments under this lease during the years ended December 31, 1996,
1997 and 1998 totaled approximately $90,900, $1,500 and $7,500, respectively.
In May 1998, HealthGate purchased certain fixed assets from an employee for
total consideration of $70,000.
9. COMMITMENTS
HealthGate leases all facilities under operating lease agreements and
certain equipment under noncancelable capital lease agreements. Total rent
expense under noncancelable operating leases was approximately $58,800, $84,100
and $89,900 for the years ended December 31, 1996, 1997 and 1998, respectively.
The future minimum lease commitments under all noncancelable leases at December
31, 1998 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- ----------
<S> <C> <C>
1999.................................................................. $ 390,112 $ 257,106
2000.................................................................. 265,083 214,298
2001.................................................................. -- 29,880
---------- ----------
Total future payments................................................. $ 655,195 501,284
----------
----------
Less--amount representing interest.................................... (61,170)
----------
Present value of minimum lease payments............................... $ 440,114
----------
----------
</TABLE>
HealthGate has entered into agreements to license content for its services
from various unrelated third parties. Future minimum license payments under
these agreements as of December 31, 1998 totaled approximately $445,617.
F-19
<PAGE>
HEALTHGATE DATA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. GEOGRAPHIC AND SEGMENT INFORMATION
HealthGate operates in one segment, which is providing healthcare and
related information to institutions and individuals through the Internet.
HealthGate's revenue from external customers was derived from the following:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ------------ ------------
<S> <C> <C> <C>
United States......................................... $ 408,244 $ 1,259,886 $ 1,665,717
Europe................................................ -- 24,750 768,406
---------- ------------ ------------
Total................................................. $ 408,244 $ 1,284,636 $ 2,434,123
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
Substantially all of HealthGate's long-lived assets were located in the
United States for all periods presented.
F-20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,600,000 Shares
[LOGO]
Common Stock
------------------------
PROSPECTUS
------------------
SG COWEN
BANC OF AMERICA SECURITIES LLC
VOLPE BROWN WHELAN & COMPANY
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses payable by HealthGate
in connection with the sale of the common stock being registered hereby. All the
amounts shown are estimates, except the SEC registration fee and the NASD filing
fee.
<TABLE>
<S> <C>
SEC registration fee.................................................... $17,648.00
NASD filing fee......................................................... 5,675.00
Nasdaq listing fee...................................................... *
Blue Sky fee and expenses............................................... *
Printing and engraving expenses......................................... *
Legal fees and expenses................................................. *
Auditors' accounting fees and expenses.................................. *
Transfer Agent and Registrar fees....................................... *
Miscellaneous expenses.................................................. *
---------
Total............................................................... $ *
</TABLE>
- ------------------------
* To be filed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article IX of HealthGate's Restated Charter provides as follows:
To the maximum extent permitted by the General Corporation Law of the State
of Delaware as the same exists or may hereafter be amended, no director of the
Corporation shall be personally liable to the Corporation or to any of its
stockholders for monetary damages arising out of such director's breach of
fiduciary duty as a director of the Corporation. No amendment to or repeal of
the provisions of this paragraph shall apply to or have any effect on the
liability or the alleged liability of any director of the Corporation with
respect to any act or failure to act of such director occurring prior to such
amendment or repeal.
Section 10 of HealthGate's Restated Bylaws provides as follows:
Section 10. INDEMNIFICATION
10.1 Officers, Directors and Others. Each person who was or is made a party
or is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he, or a person of whom
he or she is the legal representative, is or was a director or officer of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee, fiduciary, or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, shall be indemnified and
held harmless by the corporation to the fullest extent which it is empowered to
do so unless prohibited from doing so by the General Corporation Law of the
State of Delaware, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
corporation to provide broader indemnification rights than said law permitted
the corporation to provide prior to such amendment) against all expense,
liability and loss (including attorneys' fees actually and reasonably incurred
by such person in connection with such proceeding) and such indemnification
shall inure to the benefit of his or her heirs, executors and administrators;
provided, however, that, except as provided in Section 10.2 hereof, the
corporation shall indemnify any such person seeking indemnification in
connection with a proceeding initiated by such person only if
II-1
<PAGE>
such proceeding was authorized by the board of directors. The right to
indemnification conferred in this Section 10 shall be a contract right and,
subject to Sections 10.2 and 10.5 hereof, shall include the right to be paid by
the corporation the expenses incurred in defending any such proceeding in
advance of its final disposition. The corporation may, by action of the board of
directors, provide indemnification to employees and agents of the corporation
with the same scope and effect as the foregoing indemnification of directors and
officers.
10.2 Procedure; Timing. Any indemnification of a director or officer of the
corporation under Section 10.1 or advance of expenses under Section 10.5 shall
be made promptly, and in any event within thirty days, upon the written request
of the director or officer. If a determination by the corporation that the
director or officer is entitled to indemnification pursuant to this Section 10
is required, and the corporation fails to respond within sixty days to a written
request for indemnity, the corporation shall be deemed to have approved the
request. If the corporation denies a written request for indemnification or
advancing of expenses, in whole or in part, or if payment in full pursuant to
such request is not made within thirty days, the right to indemnification or
advances as granted by this Section 10 shall be enforceable by the director or
officer in any court of competent jurisdiction. Such person's costs and expenses
incurred in connection with successfully establishing his or her right to
indemnification, in whole or in part, in any such action shall also be
indemnified by the corporation. It shall be a defense to any such action (other
than an action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the required undertaking,
if any, has been tendered to the corporation) that the claimant has not met the
standards of conduct which make it permissible under the General Corporation Law
of the State of Delaware for the corporation to indemnify the claimant for the
amount claimed, but the burden of such defense shall be on the corporation.
Neither the failure of the corporation (including its board, independent legal
counsel or its stockholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he or she has met the applicable standard of conduct
set forth in the General Corporation Law of the State of Delaware, nor an actual
determination by the corporation (including its board, independent legal counsel
or its stockholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that the
claimant has not met the applicable standard of conduct.
10.3 Rights Not Exclusive. The rights to indemnification and the payment of
expenses incurred in defending a proceeding in advance of its final disposition
conferred in this Section 10 shall not be exclusive of any other right which any
person may have or hereafter acquire under any statute, provision of the
Restated Certificate, bylaw, agreement, vote of stockholders or disinterested
directors or otherwise.
10.4 Insurance. The corporation may purchase and maintain insurance on its
own behalf and on behalf of any person who is or was a director, officer,
employee, fiduciary or agent of the corporation or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him or her and incurred by him or her in any such
capacity, whether or not the corporation would have the power to indemnify such
person against such liability under this Section 10.
10.5 Expenses. Expenses incurred by any person described in Section 10.1 in
defending a proceeding shall be paid by the corporation in advance of such
proceeding's final disposition unless otherwise determined by the board in the
specific case upon receipt of an undertaking by or on behalf of the director or
officer to repay such amount if it shall ultimately be determined that he or she
is not entitled to be indemnified by the corporation. Such expenses incurred by
other employees and agents may be so paid upon such terms and conditions, if
any, as the board deems appropriate.
10.6 Other Persons. Persons who are not covered by the foregoing provisions
of this Section 10 and who are or were employees or agents of the corporation,
or who are or were serving at the request
II-2
<PAGE>
of the corporation as employees or agents of another corporation, partnership,
joint venture, trust or other enterprise, may be indemnified to the extent
authorized at any time or from time to time by the board.
10.7 Contract Right. The provisions of this Section 10 shall be deemed to be
a contract right between the corporation and each director or officer who serves
in any such capacity at any time while this Section 10 and the relevant
provisions of the General Corporation Law of the State of Delaware or other
applicable law are in effect, and any repeal or modification of this Section 10
or any such law shall not affect any rights or obligations then existing with
respect to any state of facts or proceeding then existing.
10.8 Use of "corporation". For purposes of this Section 10, references to
"the corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
or agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, member, manager, employee
or agent of another corporation, limited liability company, partnership, joint
venture, trust or other enterprise, shall stand in the same position under this
Section 10 with respect to the resulting or surviving corporation as he or she
would have with respect to such constituent corporation if its separate
existence had continued.
OTHER INDEMNIFICATION PROVISIONS
Section 145 of the Delaware General Corporation Law, as amended, provides
that a corporation has the power to indemnify a director, officer, employee or
agent of the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position, if such person shall have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, in any criminal proceeding, if such person
had no reasonably cause to believe his conduct was unlawful; provided that, in
the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the adjudicating court determines that such indemnification is
proper under the circumstances.
Under Section 6(b) of the Underwriting Agreement, the underwriters are
obligated, under certain circumstances, to indemnify directors and officers of
the Registrant against certain liabilities, including liabilities under the
Securities Act. Reference is made to the form of Underwriting Agreement filed as
Exhibit 1.1 hereto.
The Registrant intends to obtain insurance which insures the officers and
directors of the Registrant against certain losses and which insures the
Registrant against certain of its obligations to indemnify such officers and
directors.
The Registrant has entered into indemnification agreements with each of its
directors and officers, pursuant to which the Registrant has agreed to indemnify
such directors to the fullest extent permitted by law for amounts paid and
expenses incurred in connection with an action or proceeding to which he or she
is or is threatened to be made a party by reason of such position.
At present, there is no pending litigation or proceeding involving a
director or officer of the Registrant as to which indemnification is being
sought nor is the Registrant aware of any threatened litigation that may result
in claims for indemnification by any director or officer.
II-3
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this Registration Statement, we
have sold the following securities in transactions exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) or Rule 701
promulgated under Section 3(b) thereof:
On June 14, 1996, we issued and sold 250 shares of our Series B Convertible
Preferred Stock to Nichols Research Corporation for an aggregate consideration
of $400,000 in cash.
Between August 21, 1996 and September 3, 1996, we issued and sold an
aggregate of 1,000 shares of our Series C Convertible Preferred Stock to 5
existing stockholders and 17 new investors for an aggregate consideration of
$1,000,000 in cash.
On October 4, 1996, we issued and sold 50 shares of our common stock for an
aggregate consideration of $140 in cash to a former employee who exercised an
outstanding stock option.
On December 20, 1996, we issued and sold 1,000 shares of our Series D
Convertible Preferred Stock to Blackwell Science, Ltd. for an aggregate
consideration of $1,500,000 in cash.
On April 29, 1997, we issued and sold 333 shares of our Series D Convertible
Preferred Stock to Blackwell Science, Ltd. for an aggregate consideration of
$499,500 in cash.
On September 19, 1997, we issued and sold 334 shares of our Series D
Convertible Preferred Stock to Blackwell Wissenschafts-Verlag GmbH for an
aggregate consideration of $501,000 in cash.
On March 26, 1998, we issued a warrant to purchase 114,950 shares of our
common stock to Petra Capital, LLC as additional consideration for Petra's
$2,000,000 loan to us.
On July 14, 1998, we issued and sold 50 shares of our common stock for an
aggregate consideration of $140 in cash to a former employee who exercised an
outstanding stock option.
On October 20, 1998, we issued and sold 1,225 shares of our common stock for
an aggregate consideration of $3,430 in cash to a former employee who exercised
an outstanding stock option.
On February 3, 1999, we issued and sold 20 shares of our common stock for an
aggregate consideration of $56.80 in cash to a former employee who exercised an
outstanding stock option.
On April 7, 1999, we issued and sold 87,364 shares of our Series E
Convertible Preferred Stock to GE Capital Equity Investments, Inc. for an
aggregate consideration of $999,994.55 in cash and 174,729 shares of our Series
E Convertible Preferred Stock to Blackwell Science, Ltd. for an aggregate
consideration of $2,000,000, paid by means of Blackwell's conversion of the
principal amount due under a convertible promissory note issued by us to
Blackwell on September 29, 1998 in the principal amount of $2,000,000. In
connection with our sale of our Series E Convertible Preferred Stock to GE
Capital Equity Investments, we paid Dain Rauscher Wessels a placement agent
commission of $40,000 in cash.
On April 21, 1999, we issued and sold 458,664 shares of our Series E
Convertible Preferred Stock to GE Capital Equity Investments for an aggregate
consideration of $5,250,005.74 in cash. In connection with this sale, we paid
Dain Rauscher Wessels a placement agent commission of $210,000 in cash. In
addition, in connection with this sale and the April 7, 1999 sale of Series E
Convertible Preferred Stock to GE Capital Equity Investments, we issued Dain
Rauscher Wessels a warrant to purchase 5,460 shares of our common stock for
$11.45 per share and reimbursed them $50,000 in cash for their out of pocket
expenses.
II-4
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation of the Registrant, dated March 14, 1995, as further
amended by a Certificate of Amendment of Amended and Restated Certificate of Incorporation, dated May
23, 1995, as further amended by a Certificate of Amendment of Amended and Restated Certificate of
Incorporation, dated October 17, 1995, as further amended by a Certificate of Amendment of Amended and
Restated Certificate of Incorporation, dated August 19, 1996, as further amended by a Certificate of
Amendment of Amended and Restated Certificate of Incorporation, dated December 19, 1996, as further
amended by a Certificate of Amendment of Amended and Restated Certificate of Incorporation, dated June
20, 1997, as further amended by a Certificate of Amendment of Amended and Restated Certificate of
Incorporation, dated March 26, 1998, as further amended by a Certificate of Amendment of Amended and
Restated Certificate of Incorporation, dated May 22, 1998, as further amended by a Certificate of
Amendment of Amended and Restated Certificate of Incorporation, dated April 2, 1999.
3.2** Certificate of Amendment of Amended and Restated Certificate of Incorporation, in the form to be filed
prior to the offering.
3.3** Amended and Restated Certificate of Incorporation of the Registrant, in the form to be filed
immediately prior to the offering.
3.4* Amended and Restated Bylaws of the Registrant.
3.5** Second Amended and Restated Bylaws of the Registrant, in the form to be effective upon the consummation
of the offering.
4.1** Specimen Common Stock certificate.
4.2* Registration Agreement dated March 16, 1995 by and between the Registrant, David Friend and William
Nelson.
4.3* Registration Agreement dated October 18, 1995 by and between the Registrant and Nichols Research
Corporation.
4.4* Registration Agreement dated August 21, 1996 by and between the Registrant and certain investor
signatories thereto.
4.5* Registration Agreement dated December 20, 1996 by and between the Registrant and Blackwell Science,
Ltd.
4.6* Registration Agreement dated March 26, 1998 by and between the Registrant and Petra Capital, LLC.
4.7* Registration Agreement dated April 7, 1999 by and between the Registrant, GE Capital Equity
Investments, Inc., Blackwell Science, Ltd. and Blackwell Wissenschafts-Verlag GmbH.
4.8* Amendment to Purchase Agreements and Registrations Agreements dated as of March 23, 1998 by and among
the Registrant and certain stockholder signatories thereto.
4.9* Amended and Restated Stockholders Agreement dated April 7, 1999 by and among the Registrant and certain
stockholder signatories thereto.
5.1** Opinion of Rich, May, Bilodeau & Flaherty, P.C., as to the legality of the shares being registered.
10.1* Electronic Journal Software Development, Hosting and Management Agreement dated as of March 20, 1998 by
and between Blackwell Science Limited, Munksgaard International Publishers Ltd. and the Registrant
(excluding Schedules).
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.2* activePress Journal Hosting and Delivery Agreement dated April 20, 1999 by and between Massachusetts
Medical Society and the Registrant.
10.3* Content License Agreement dated as of October 1, 1998 by and between Clinical Reference Systems, a
division of Access Health, Inc. and the Registrant (excluding Exhibit B).
10.4* Electronic Media License Agreement dated as of June 16, 1998 by and between Western Adventist Health
Services, d/b/a Cinahl Information Systems, and the Registrant.
10.5* Agreement dated as of January 1997 by and between Physicians World Communications Group and the
Registrant.
10.6* Agreement dated as of June 18, 1998 by and between Data General Corporation and the Registrant
(excluding Schedules).
10.7* Sub-Lease Agreement dated March 1, 1999 by and between Synopsys, Inc. and the Registrant (excluding
Exhibits).
10.8* Internet Data Center Services Agreement dated as of December 30, 1998 by and between Exodus
Communications, Inc. and the Registrant.
10.9* 1994 Stock Option Plan of the Registrant, as amended.
10.10* Form of Incentive Stock Option Agreement granted under 1994 Stock Option Plan of the Registrant.
10.11* Form of Non-Employee Director Option Agreement granted under 1994 Stock Option Plan of the Registrant.
10.12* Stock Option Agreement dated as of December 9, 1996 by and between the Registrant and Edson D. de
Castro.
10.13* Stock Option Agreement dated as of November 12, 1997 by and between the Registrant and Edson D. de
Castro.
10.14* Employment Agreement dated as of October 1, 1995 by and between the Registrant and William S. Reece.
10.15* Loan and Security Agreement dated as of March 26, 1998 by and between the Registrant and Petra Capital,
LLC.
10.16* First Amendment to Loan and Security Agreement and Stock Purchase Warrant dated as of April 7, 1999 by
and between the Registrant and Petra Capital, LLC.
10.17* $2,000,000 Secured Promissory Note of the Registrant dated March 26, 1998 and payable to the order of
Petra Capital, LLC.
10.18* Stock Purchase Warrant dated as of March 26, 1998 issued by the Registrant in favor of Petra Capital,
LLC.
10.19* Stock Purchase Agreement dated as of April 5, 1999 by and between the Registrant, GE Capital Equity
Investments, Inc. and Blackwell Science, Ltd., without exhibits or schedules.
10.20 Stock Purchase Warrant dated as of April 21, 1999 issued by the Registrant in favor of Dain Rauscher
Wessels.
10.21* Standard Distribution Agreement dated as of July 28, 1998 by and between the Registrant and
Inteli-Health, Inc.
10.22* Standard Distribution Agreement dated July 15, 1998 by and between the Registrant and AHN Partners,
L.P. d/b/a America's Health Network.
10.23* Hyperlink Agreement dated May 29, 1996 by and between the Registrant and the American Medical
Association.
10.24* Standard Distribution Agreement dated June 3, 1998 by and between the Registrant and Greenberg News
Networks, Inc.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<C> <S>
10.25* Web Site Hosting Agreement dated October 30, 1998 by and between the Registrant and Endeavor
Technologies, Inc.
10.26* Continuing Medical Education Programs License Agreement dated as of April 1, 1996 between the
Registrant and the Trustees of Boston University.
21.1* List of Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants.
23.2** Consent of Rich, May, Bilodeau & Flaherty, P.C. (included in Exhibit 5.1)
24.1* Power of Attorney contained on signature page of Registration Statement on Form S-1 filed on April 23,
1999.
27.1 Financial Data Schedule.
99.1 Schedule II--Valuation and Qualifying Accounts.
</TABLE>
- ------------------------
* Previously filed with the Registrant's Registration Statement on Form S-1,
filed with the Securities and Exchange Commission on April 23, 1999.
** To be filed by amendment
(B) FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts (See Exhibit 99.1)
All other schedules have been intentionally omitted because they are either
not required or the information has been included in the Notes to the
Consolidated Financial Statements included as part of this Registration
Statement.
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described under "Item
14--Indemnification of Directors and Officers" above, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Burlington,
Massachusetts, on this 21(st) day of May, 1999.
HEALTHGATE DATA CORP.
By: /s/ WILLIAM S. REECE
-----------------------------------------
William S. Reece
CHAIRMAN OF THE BOARD OF DIRECTORS
AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY AND SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
Chairman of the Board of
/s/ WILLIAM S. REECE Directors, Chief
- ------------------------------ Executive Officer and May 21, 1999
William S. Reece President (Principal
executive officer)
Chief Financial Officer and
/s/ MARY B. MILLER Treasurer (Principal
- ------------------------------ financial and accounting May 21, 1999
Mary B. Miller officer)
* /s/ TINA M. H. BLAIR Director
- ------------------------------ May 21, 1999
Tina M. H. Blair, M.D.
* /s/ JONATHAN J. G. Director
CONIBEAR
- ------------------------------ May 21,1999
Jonathan J. G. Conibear
* /s/ EDSON D. DE CASTRO Director
- ------------------------------ May 21, 1999
Edson D. de Castro
* /s/ DAVID FRIEND Director
- ------------------------------ May 21, 1999
David Friend
* /s/ CHRIS H. HORGEN Director
- ------------------------------ May 21, 1999
Chris H. Horgen
/s/ WILLIAM S. REECE
----------------------------------------
William S. Reece
*By ATTORNEY-IN-FACT
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<C> <S>
1.1** Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation of the Registrant, dated March 14, 1995, as further
amended by a Certificate of Amendment of Amended and Restated Certificate of Incorporation, dated May
23, 1995, as further amended by a Certificate of Amendment of Amended and Restated Certificate of
Incorporation, dated October 17, 1995, as further amended by a Certificate of Amendment of Amended and
Restated Certificate of Incorporation, dated August 19, 1996, as further amended by a Certificate of
Amendment of Amended and Restated Certificate of Incorporation, dated December 19, 1996, as further
amended by a Certificate of Amendment of Amended and Restated Certificate of Incorporation, dated June
20, 1997, as further amended by a Certificate of Amendment of Amended and Restated Certificate of
Incorporation, dated March 26, 1998, as further amended by a Certificate of Amendment of Amended and
Restated Certificate of Incorporation, dated May 22, 1998, as further amended by a Certificate of
Amendment of Amended and Restated Certificate of Incorporation, dated April 2, 1999.
3.2** Certificate of Amendment of Amended and Restated Certificate of Incorporation, in the form to be filed
prior to the offering.
3.3** Amended and Restated Certificate of Incorporation of the Registrant, in the form to be filed
immediately prior to the offering.
3.4* Amended and Restated Bylaws of the Registrant.
3.5** Second Amended and Restated Bylaws of the Registrant, in the form to be effective upon the consummation
of the offering.
4.1** Specimen Common Stock certificate.
4.2* Registration Agreement dated March 16, 1995 by and between the Registrant, David Friend and William
Nelson.
4.3* Registration Agreement dated October 18, 1995 by and between the Registrant and Nichols Research
Corporation.
4.4* Registration Agreement dated August 21, 1996 by and between the Registrant and certain investor
signatories thereto.
4.5* Registration Agreement dated December 20, 1996 by and between the Registrant and Blackwell Science,
Ltd.
4.6* Registration Agreement dated March 26, 1998 by and between the Registrant and Petra Capital, LLC.
4.7* Registration Agreement dated April 7, 1999 by and between the Registrant, GE Capital Equity
Investments, Inc., Blackwell Science, Ltd. and Blackwell Wissenschafts-Verlag GmbH.
4.8* Amendment to Purchase Agreements and Registrations Agreements dated as of March 23, 1998 by and among
the Registrant and certain stockholder signatories thereto.
4.9* Amended and Restated Stockholders Agreement dated April 7, 1999 by and among the Registrant and certain
stockholder signatories thereto.
5.1** Opinion of Rich, May, Bilodeau & Flaherty, P.C., as to the legality of the shares being registered.
10.1* Electronic Journal Software Development, Hosting and Management Agreement dated as of March 20, 1998 by
and between Blackwell Science Limited, Munksgaard International Publishers Ltd. and the Registrant
(excluding Schedules).
10.2* activePress Journal Hosting and Delivery Agreement dated April 20, 1999 by and between Massachusetts
Medical Society and the Registrant.
10.3* Content License Agreement dated as of October 1, 1998 by and between Clinical Reference Systems, a
division of Access Health, Inc. and the Registrant (excluding Exhibit B).
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.4* Electronic Media License Agreement dated as of June 16, 1998 by and between Western Adventist Health
Services, d/b/a Cinahl Information Systems, and the Registrant.
10.5* Agreement dated as of January 1997 by and between Physicians World Communications Group and the
Registrant.
10.6* Agreement dated as of June 18, 1998 by and between Data General Corporation and the Registrant
(excluding Schedules).
10.7* Sub-Lease Agreement dated March 1, 1999 by and between Synopsys, Inc. and the Registrant (excluding
Exhibits).
10.8* Internet Data Center Services Agreement dated as of December 30, 1998 by and between Exodus
Communications, Inc. and the Registrant.
10.9* 1994 Stock Option Plan of the Registrant, as amended.
10.10* Form of Incentive Stock Option Agreement granted under 1994 Stock Option Plan of the Registrant.
10.11* Form of Non-Employee Director Option Agreement granted under 1994 Stock Option Plan of the Registrant.
10.12* Stock Option Agreement dated as of December 9, 1996 by and between the Registrant and Edson D. de
Castro.
10.13* Stock Option Agreement dated as of November 12, 1997 by and between the Registrant and Edson D. de
Castro.
10.14* Employment Agreement dated as of October 1, 1995 by and between the Registrant and William S. Reece.
10.15* Loan and Security Agreement dated as of March 26, 1998 by and between the Registrant and Petra Capital,
LLC.
10.16* First Amendment to Loan and Security Agreement and Stock Purchase Warrant dated as of April 7, 1999 by
and between the Registrant and Petra Capital, LLC.
10.17* $2,000,000 Secured Promissory Note of the Registrant dated March 26, 1998 and payable to the order of
Petra Capital, LLC.
10.18* Stock Purchase Warrant dated as of March 26, 1998 issued by the Registrant in favor of Petra Capital,
LLC.
10.19* Stock Purchase Agreement dated as of April 5, 1999 by and between the Registrant, GE Capital Equity
Investments, Inc. and Blackwell Science, Ltd., without exhibits or schedules.
10.20 Stock Purchase Warrant dated as of April 21, 1999 issued by the Registrant in favor of Dain Rauscher
Wessels.
10.21* Standard Distribution Agreement dated as of July 28, 1998 by and between the Registrant and
Inteli-Health, Inc.
10.22* Standard Distribution Agreement dated July 15, 1998 by and between the Registrant and AHN Partners,
L.P. d/b/a America's Health Network.
10.23* Hyperlink Agreement dated May 29, 1996 by and between the Registrant and the American Medical
Association.
10.24* Standard Distribution Agreement dated June 3, 1998 by and between the Registrant and Greenberg News
Networks, Inc.
10.25* Web Site Hosting Agreement dated October 30, 1998 by and between the Registrant and Endeavor
Technologies, Inc.
10.26* Continuing Medical Education Programs License Agreement dated as of April 1, 1996 between the
Registrant and the Trustees of Boston University.
21.1* List of Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants.
23.2** Consent of Rich, May, Bilodeau & Flaherty, P.C. (included in Exhibit 5.1)
24.1* Power of Attorney (contained on signature page of the Registration Statement on Form S-1 filed on April
23, 1999.).
</TABLE>
<PAGE>
<TABLE>
<C> <S>
27.1 Financial Data Schedule.
99.1 Schedule II--Valuation and Qualifying Accounts.
</TABLE>
- ------------------------
* Previously filed with Registrant's Registration Statement on Form S-1, filed
with the Securities and Exchange Commission on April 23, 1999.
** To be filed by amendment
<PAGE>
EXHIBIT 99.1
HEALTHGATE DATA CORP.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO
BEGINNING COSTS AND BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS END OF PERIOD
- -------------------------------------------------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
December 31, 1996..................................... -- -- -- --
December 31, 1997..................................... -- $ 3,500 -- $ 3,500
December 31, 1998..................................... $ 3,500 $ 20,000 $ (3,500)(1) $ 20,000
March 31, 1999........................................ $ 20,000 $ 6,170 -- $ 26,170
</TABLE>
- ------------------------
(1) Writeoff of uncollectable accounts and other reductions, net of recoveries.
SCH-1
<PAGE>
Exhibit 10.20
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND
APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS THEY HAVE BEEN REGISTERED UNDER THE ACT AND APPLICABLE STATE
SECURITIES LAWS OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
HEALTHGATE DATA CORP.
WARRANT FOR COMMON STOCK
April 21, 1999
VOID AFTER APRIL 21, 2002
THIS CERTIFIES that, for value received, DAIN RAUSCHER WESSELS, a
division of Dain Rauscher Incorporated, or its registered assigns, is entitled
to subscribe for and purchase from HEALTHGATE DATA CORP., a Delaware corporation
(hereinafter called the "Corporation"), at the price of $11.45 per share (such
price, as it may be from time to time adjusted as hereinafter provided, being
hereinafter called the "Warrant Exercise Price"), at any time after April 21,
2000 and on or prior to April 21, 2002, up to 5460 (subject to adjustment as
hereinafter provided) fully paid and nonassessable shares of Common Stock, $.01
par value (hereinafter called the "Common Stock"), of the Corporation, subject,
however, to the provisions and upon the terms and conditions hereinafter set
forth. This Warrant, each such other warrant and any warrant or warrants
subsequently issued upon exchange or transfer hereof or thereof are hereinafter
collectively called the "Warrants."
Section 1. EXERCISE OF WARRANT.
(a) METHOD OF EXERCISE. The rights represented by this Warrant may be
exercised by the holder hereof, in whole at any time or from time to time in
part, but not as to a fractional share of Common Stock, by the surrender of this
Warrant, together with a written notice of exercise (a "Notice of Exercise") and
payment, at the office of the Corporation specified in or pursuant to Section 8
hereof. The Exercise Price shall be payable at the option of the holder (i) by
certified check, or (ii) if the Corporation's common stock is publicly traded,
pursuant to the cashless exercise provision set forth in Section 1(b).
(b) CASHLESS EXERCISE. If at the time the Warrant is exercised, the
Corporation's common stock has been publicly traded for at least thirty (30)
trading days, in lieu of payment of the Exercise Price in cash, at the option of
the holder, the holder may in the Notice of Exercise request a net issuance
exercise, in which event, the Corporation shall issue to the holder hereof a
number of shares of Common Stock equal to (A) the number of shares of Common
Stock
<PAGE>
acquirable upon exercise in full of this Warrant (or, if applicable, the portion
hereof being exercised), as at such date, multiplied by (B) the balance
remaining after deducting (x) the Warrant Exercise Price, as in effect on such
date, from (y) the fair market value of one share of Common Stock as at such
date and dividing the result by (C) such fair market value.
For purposes of this section (b), the fair market value of the Common
Stock shall be determined as follows: if the Common Stock is listed or admitted
to trading on one or more national securities exchanges, the average of the last
reported sales prices per share regular way or, in case no such reported sales
takes place on any such day, the average of the last reported bid and asked
prices per share regular way, in either case on the principal national
securities exchange on which the Common Stock is listed or admitted to trading,
for the thirty (30) trading days immediately preceding the date upon which the
fair market value is determined (the "Determination Date"); if the Common Stock
is not listed or admitted to trading on a national securities exchange but is
quoted by the NASD Automated Quotation System ("NASDAQ"), the average of the
last reported sales prices per share regular way or, in case no reported sale
takes place on any such day or the last reported sales prices are not then
quoted by NASDAQ, the average for each such day of the last reported bid and
asked prices per share, for the thirty (30) trading days immediately preceding
the Determination Date as furnished by the National Quotation Bureau
Incorporated or any similar successor organization.
(c) DELIVERY OF CERTIFICATES, ETC. In the event of any exercise of the
rights represented by this Warrant, a certificate or certificates for the shares
of Common Stock so purchased, registered in the name of the holder, shall be
delivered to the holder hereof within a reasonable time, not exceeding ten (10)
business days, after the rights represented by this Warrant shall have been so
exercised; and, unless this Warrant has expired, a new Warrant representing the
number of shares (except a remaining fractional share), if any, with respect to
which this Warrant shall not then have been exercised shall also be issued to
the holder hereof within such time. The person in whose name any certificate for
shares of Common Stock is issued upon exercise of this Warrant shall for all
purposes be treated as having become the holder of record of such shares on the
date on which the Warrant was surrendered, together with a properly completed
Notice of Exercise, and payment of the Warrant Exercise Price and any applicable
taxes was made, except that, if the date of such surrender and payment is a date
on which the stock transfer books of the Corporation are closed, such person
shall be treated as having become the holder of such shares at the close of
business on the next succeeding date on which the stock transfer books are open.
Section 2. ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment of the
Warrant Exercise Price as provided in Section 3, the holder of this Warrant
shall thereafter be entitled to purchase, at the Warrant Exercise Price
resulting from such adjustment and subject to the provisions of Section 1, the
number of shares (calculated to the nearest whole share) obtained by multiplying
the Warrant Exercise Price in effect immediately prior to such adjustment by the
number of shares purchasable pursuant hereto immediately prior to such
adjustment and dividing the product thereof by the Warrant Exercise Price
resulting from such adjustment.
2
<PAGE>
Section 3. ADJUSTMENT OF PRICE UPON STOCK SPLITS, STOCK DIVIDENDS AND
REORGANIZATIONS. The adjustments provided for in this Section 3 shall be made
for any events occurring on or after April 21, 1999.
(a) SUBDIVISION OR COMBINATION OF STOCK. In case the Corporation shall
at any time subdivide its outstanding shares of Common Stock into a greater
number of shares, the Warrant Exercise Price in effect immediately prior to such
subdivision shall be proportionately reduced, and conversely, in case the
outstanding shares of Common Stock of the Corporation shall be combined into a
smaller number of shares, the Warrant Exercise Price in effect immediately prior
to such combination shall be proportionately increased.
(b) STOCK DIVIDENDS. In case the Corporation shall declare a dividend
or make any other distribution upon any stock of the Corporation payable in
Common Stock, or rights to subscribe for Common Stock or any stock or securities
convertible or exchangeable for Common Stock, any Common Stock, issuable without
consideration in payment of such dividend or distribution shall be treated as
having been issued or sold without consideration, and the Warrant Exercise Price
shall be reduced as if the Corporation had subdivided its outstanding shares of
Common Stock into a greater number of shares, as provided in paragraph (a)
above.
(c) REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE. If
any capital reorganization or reclassification of the capital stock of the
Corporation or any consolidation or merger of the Corporation with or into
another corporation, or the sale of all or substantially all of its assets to
another corporation shall be effected in such a way (including, without
limitation, by way of consolidation or merger) that holders of Common Stock
shall be entitled to receive stock, securities or assets with respect to or in
exchange for Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provisions
shall be made whereby each holder of Warrants shall thereafter have the right to
receive, upon the basis and upon the terms and conditions specified herein and
in lieu of the shares of Common Stock of the Corporation immediately theretofore
receivable upon the exercise of such Warrants, such shares of stock, securities
or assets as may be issued or payable with respect to or in exchange for a
number of outstanding shares of such Common Stock equal to the number of shares
of such stock immediately theretofore so receivable had such reorganization,
reclassification, consolidation, merger or sale not taken place, and in any such
case appropriate provision shall be made with respect to the rights and
interests of such holder to the end that the provisions hereof (including,
without limitation, provisions for adjustment of the Warrant Exercise Price)
shall thereafter be applicable, as nearly practicable, in relation to any shares
of stock, securities or assets thereafter deliverable upon the exercise of such
exercise rights. The Corporation will not effect any such consolidation or
merger, or any sale of all or substantially all of its assets and properties,
unless prior to the consummation thereof the successor corporation (if other
than the Corporation) resulting from such consolidation or merger or the
corporation purchasing such assets shall assume by written instrument, executed
and mailed or delivered to each holder of Warrants at the last address of such
holder appearing on the records of the Corporation, the obligation to deliver to
such holder such shares of stock, securities or assets as, in accordance with
the foregoing provisions, such holder may be entitled to receive.
3
<PAGE>
(d) NOTICE OF ADJUSTMENT. Upon any adjustment of the Warrant Exercise
Price, then and in each such case the Corporation shall give written notice
thereof, by first class mail postage prepaid, addressed to each holder of
Warrants at the address of such holder as shown on the records of the
Corporation, which notice shall state the Warrant Exercise Price resulting from
such adjustment, setting forth in reasonable detail the method of calculation
and the facts upon which such calculation is based.
(e) CERTAIN EVENTS. If any event occurs as to which in the opinion of
the Board of Directors of the Corporation the other provisions of this Section 3
are not strictly applicable or if strictly applicable would not fairly protect
the exercise rights of this Warrant, in accordance with the essential intent and
principles of such provisions to protect against dilution, then such Board of
Directors shall in good faith make an adjustment in the application of such
provisions, in accordance with such essential intent and principles, so as to
protect such exercise rights as aforesaid.
(f) STOCK TO BE RESERVED. The Corporation will at all times reserve and
keep available out of its authorized Common Stock or its treasury shares, solely
for the purpose of issue upon the exercise of this Warrant as herein provided,
such number of shares of Common Stock as shall then be issuable upon the
exercise of this Warrant. The Corporation covenants that all shares of Common
Stock which shall be so issued shall be duly and validly issued and fully paid
and nonassessable and free from all taxes, liens and charges with respect to the
issue thereof, and, without limiting the generality of the foregoing, the
Corporation covenants that it will from time to time take all such action as may
be requisite to assure that the par value per share of the Common Stock is at
all times equal to or less than the effective Warrant Exercise Price. The
Corporation will take all such action as may be necessary to assure that all
such shares of Common Stock may be so issued without violation of any applicable
law or regulation, or of any requirements of any national securities exchange
upon which the Common Stock of the Corporation may be listed; PROVIDED, HOWEVER,
that this sentence shall not obligate the Corporation to register such shares
under the Securities Act of 1933, as amended (the "Securities Act"), or any
applicable state securities laws or to take any action to enable the sale or
transfer of such shares to be made in accordance with Rule 144 under the
Securities Act.
Section 4. NOTICES OF RECORD DATES. In the event of
(1) any taking by the Corporation of a record of the holders of
any class of securities for the purpose of determining the
holders thereof who are entitled to receive any dividend or
other distribution (other than cash dividends out of earned
surplus), or any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other
securities or property, or to receive any other right, or
(2) any capital reorganization of the Corporation, any
reclassification or recapitalization of the capital stock of
the Corporation or any sale of all or substantially all the
assets of the Corporation to or consolidation or merger of the
Corporation with or into any other corporation, or
4
<PAGE>
(3) any voluntary or involuntary dissolution, liquidation or
winding-up of the Corporation,
then and in each such event the Corporation will give notice to the holder of
this Warrant specifying (i) the date on which any such record is to be taken for
the purpose of such dividend, distribution or right and stating the amount and
character of such dividend, distribution or right, and (ii) the date on which
any such reorganization, reclassification, recapitalization, sale,
consolidation, merger, dissolution, liquidation or winding up is to take place,
and the time, if any is to be fixed, as of which the holders of record of Common
Stock will be entitled to exchange their shares of Common Stock for securities
or other property deliverable upon such reorganization, reclassification,
recapitalization, sale, consolidation, merger, dissolution, liquidation or
winding-up. Such notice shall be given at least ten (10) days and not more than
ninety (90) days prior to the date therein specified.
Section 5. NO STOCKHOLDER RIGHTS. This Warrant shall not entitle the
holder hereof to any voting rights or other rights as a stockholder of the
Corporation.
Section 6. INVESTMENT REPRESENTATION AND LEGEND. The holder, by
acceptance of the Warrant, represents and warrants to the Corporation that it is
acquiring the Warrant and the shares of Common Stock (or other securities)
issuable upon the exercise hereof for investment purposes only and not with a
view towards the resale or other distribution thereof and agrees that the
Corporation may affix upon this Warrant the following legend:
"NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON THE EXERCISE OF THIS
WARRANT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS THEY HAVE BEEN REGISTERED
UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS OR UNLESS AN
EXEMPTION FROM REGISTRATION IS AVAILABLE."
The holder, by acceptance of this Warrant, further agrees that the
Corporation may affix the following legend to certificates for shares of Common
Stock issued upon exercise of this Warrant:
"THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE
SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED
OF UNLESS THEY HAVE BEEN REGISTERED UNDER THE ACT AND APPLICABLE STATE
SECURITIES LAWS OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE."
Section 7. LOST, STOLEN, MUTILATED OR DESTROYED WARRANT. If this
Warrant is lost, stolen, mutilated or destroyed, the Corporation may, upon
delivery of an indemnity agreement reasonably satisfactory to the Corporation
and such other terms as the Corporation may otherwise in its discretion
reasonably impose (which shall, in the case of a
5
<PAGE>
mutilated Warrant, include the surrender thereof), issue a new Warrant of like
denomination and tenor as the Warrant so lost, stolen, mutilated or destroyed.
Any such new Warrant shall constitute an original contractual obligation of the
Corporation, whether or not the allegedly lost, stolen, mutilated or destroyed
Warrant shall be at any time enforceable by anyone.
Section 8. NOTICES. All notices, requests, and other communications
required or permitted to be given or delivered hereunder shall be in writing,
and shall be delivered, or shall be sent by certified or registered mail,
postage prepaid and addressed,
(i) if to the holder, to
Dain Rauscher Wessels
60 South Sixth Street, 86V6
Minneapolis, Minnesota 55402
or at such other address as shall have been furnished to the Corporation by
notice from such holder, and
(ii) if to the Corporation, to it at
HealthGate Data Corp.
25 Corporate Drive
Suite 310
Burlington, MA 01803
Attention: Chief Financial Officer
or at such other address as shall have been specified to the holder by notice
from the Corporation.
IN WITNESS WHEREOF, HEALTHGATE DATA CORP. has executed this Warrant as
of the day and year first above written.
HEALTHGATE DATA CORP.
By: /S/ WILLIAM S. REECE
-------------------------------
William S. Reece
President and Chief Executive
Officer
6
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated April 23, 1999,
relating to the financial statements of HealthGate Data Corp., which appears
in such Prospectus. We also consent to the application of such report to the
Financial Statement Schedule for the three years ended December 31, 1998
listed under Item 16(b) of this Registration Statement when such schedule is
read in conjunction with the financial statements referred to in our report.
The audits referred to in such report also included this schedule. We also
consent to the references to us under the heading "Experts" in such
Prospectus.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
May 21, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AMENDED S-1
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001081630
<NAME> HEALTHGATE DATA CORP.
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1.0
<CASH> 101,724
<SECURITIES> 0
<RECEIVABLES> 641,807
<ALLOWANCES> (26,170)
<INVENTORY> 0
<CURRENT-ASSETS> 1,053,763
<PP&E> 2,059,758
<DEPRECIATION> (1,025,942)
<TOTAL-ASSETS> 2,219,415
<CURRENT-LIABILITIES> 2,864,259
<BONDS> 0
0
7,038,138
<COMMON> 52,344
<OTHER-SE> (11,433,524)
<TOTAL-LIABILITY-AND-EQUITY> 2,219,415
<SALES> 0
<TOTAL-REVENUES> 614,805
<CGS> 0
<TOTAL-COSTS> 362,844
<OTHER-EXPENSES> 1,707,938
<LOSS-PROVISION> 6,170
<INTEREST-EXPENSE> 158,046
<INCOME-PRETAX> (1,620,193)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,620,193)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,620,193)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.34)
</TABLE>
<PAGE>
EXHIBIT 99.1
HEALTHGATE DATA CORP.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
AND THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
BALANCE AT CHARGES TO
BEGINNING COSTS AND BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS END OF PERIOD
- -------------------------------------------------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
December 31, 1996..................................... -- -- -- --
December 31, 1997..................................... -- $ 3,500 -- $ 3,500
December 31, 1998..................................... $ 3,500 $ 20,000 $ (3,500)(1) $ 20,000
March 31, 1999........................................ $ 20,000 $ 6,170 -- $ 26,170
</TABLE>
- ------------------------
(1) Writeoff of uncollectable accounts and other reductions, net of recoveries.
SCH-1
