<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 14, 1999
REGISTRATION NO. 333-76899
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
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
</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.
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>
<TABLE>
<S> <C> <C>
SUBJECT TO COMPLETION, DATED JUNE 14, 1999
PROSPECTUS
</TABLE>
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.
Our common stock has been approved for trading and quotation 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 www.healthgate.com Web site and
co-branded CHOICE Web sites 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....................................... 60
Risk Factors..................................... 9 Certain Transactions............................. 67
Use of Proceeds.................................. 23 Principal Stockholders........................... 68
Dividend Policy.................................. 23 Description of Capital Stock..................... 70
Capitalization................................... 24 Shares Eligible for Future Sale.................. 73
Dilution......................................... 25 Underwriting..................................... 76
Selected Consolidated Financial Data............. 26 Legal Matters.................................... 77
Management's Discussion and Analysis of Experts.......................................... 77
Financial Condition and Results of Where You Can Find More Information.............. 78
Operations..................................... 29 Consolidated Financial Statements................ F-1
Business......................................... 39
</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>
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) A 4.564 -FOR-1
STOCK SPLIT EFFECTIVE IMMEDIATELY PRIOR TO THE DATE OF THIS PROSPECTUS; AND (3)
NO EXERCISE BY THE UNDERWRITERS OF THE OVER-ALLOTMENT OPTION.
THE COMPANY
HealthGate is an 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 "Healthy Living" Webzines, a proprietary
series of industry recognized consumer health magazines distributed exclusively
through the Web, and have produced Wellness Centers, which are compilations of
selected information from our online libraries for consumers, 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 development and 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:
- our own Web sites, www.healthgate.com in the United States and
www.healthgate.co.uk in the United Kingdom;
- customized, co-branded CHOICE-TM- Web sites developed for hospitals and
other institutions which carry both HealthGate's and the institution's
name; and
- 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.
Our strategy includes the following key elements:
- providing leading healthcare content and technology;
- expanding the HealthGate Network;
- continuing to build the HealthGate brand;
- broadening the range of offered products and services;
- pursuing acquisitions and additional strategic affiliations; and
- continuing to grow internationally.
We currently engage in the following activities:
- developing co-branded CHOICE Web sites for hospitals and other
institutions, and distributing content through these CHOICE Web sites;
- offering banner advertising and sponsorship of discrete portions of our
content libraries to pharmaceutical companies, other healthcare
advertisers and other businesses and organizations;
- providing our activePress Web publishing services to traditional print
publishers;
- syndicating content to third party Web sites; and
- participating in electronic commerce opportunities, also known as
e-commerce, including selling articles from full-text journals, monthly
online subscriptions and medical text books.
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.......................................... 18,523,264 shares
Underwriters' over-allotment option............... 690,000 shares
Use of proceeds................................... To repay $2,000,000 of outstanding
indebtedness and for general corporate
purposes, including working capital,
expansion of our sales and marketing
efforts, content development and
licensing, advertising and brand
promotion and acquisitions or
investments. See "Use of Proceeds."
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 31, 1999. This
number does not take into account 2,372,677 shares of our common stock subject
to options outstanding under our stock option plans or other option agreements
at May 31, 1999 with a weighted exercise price of $1.68 per share. This number
also does not take into account outstanding warrants to purchase 549,551 shares
of our common stock at May 31, 1999, with a weighted average exercise price of
$.11 per share, or a warrant to purchase 1,369,200 shares of our common stock
with an anticipated exercise price of $8.25 per share, which we expect to issue
in June 1999. See "Business--Strategic Affiliations--Marketing and Distribution
Affiliations."
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 additionally 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 $2,000,000 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 $ 5,942 $ 49,442
Working capital (deficit)............................................... (1,810) 4,030 47,530
Total assets............................................................ 2,219 8,059 51,559
Long-term debt and capital lease obligations............................ 3,698 1,698 245
Redeemable convertible preferred stock.................................. 7,038 14,678 --
Common stock and other stockholders' equity (deficit)................... (11,381) (11,181) 48,450
</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 we had
an accumulated deficit of approximately $10.5 million as of December 31, 1998
and $12.2 million as of March 31, 1999. 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 IN A MANNER UNRELATED TO OUR LONG-TERM
PERFORMANCE.
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 costs to expand our operations;
- addition of new content providers or changes in our relationships with our
most important content providers, which may require more expenditures in
the early stages of these relationships;
- the level of usage of the HealthGate Network which could impact, among
other things, recognition of revenue in connection with advertising and
sponsorship sales;
9
<PAGE>
- seasonality of spending by the advertising industry, which is generally
lower in the first and third calendar quarters; and
- the amount and timing of expenses required to integrate operations and
technologies from acquisitions, joint ventures or other business
combinations or investments.
In addition, we expect to incur a substantial non-cash expense related to a
warrant we plan to issue in connection with a development and distribution
agreement entered into with GE Medical Systems. We expect this to affect our
operating results in the fiscal quarter in which the warrant is issued and, if
the warrant is not issued in the fiscal quarter in which this offering occurs,
it may also affect our operating results in the fiscal quarter in which this
offering occurs. See "Business--Strategic Affiliations-- Marketing and
Distribution Affiliations."
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 AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY.
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. With low barriers to entry
in a relatively new and rapidly evolving industry, the types of entities against
which we compete, directly and indirectly, for subscribers, consumers, content
and service providers, advertisers, sponsors and acquisition candidates is
broad. Presently, our competitors include 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;
10
<PAGE>
- 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;
- 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 WE
ARE 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 GROWTH AND ACQUISITION
STRATEGY.
Key elements of our growth strategy include making acquisitions of, or
significant investments in, complementary companies, products or technologies to
increase our content libraries, technological capabilities and customer base and
entering into other strategic affiliations. To date, we have not made any major
acquisitions or investments. For our acquisition strategy 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. 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. Simultaneously pursuing
acquisitions, strategic affiliations and other elements of our growth strategy
could be expensive, time consuming and may strain our resources. If we are not
successful in implementing our growth and acquisition strategy, our business,
results of operations and the market price of our common stock could be
adversely affected.
11
<PAGE>
In addition, we may be required to amortize significant amounts of goodwill
and other intangible assets in connection with future acquisitions, which could
adversely affect our results of operations and the market price of our common
stock.
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.
We derived approximately 13% of our revenue in the three months ended March
31, 1999 and 27% of our revenue in the year ended December 31, 1998 from the
sale of general and targeted banner advertising, including barter revenue, and
sponsorships of discrete topic areas on the HealthGate Network. In general,
barter revenue has been decreasing as a percentage of revenue. Barter
advertising revenue was $43,000 or 7% of total revenue for the three months
ended March 31, 1999 compared to $134,000 or 21% of total revenue for the three
months ended March 31, 1998 and $436,000 or 18% of total revenue for the year
ended December 31, 1998. We anticipate that barter revenue will continue to
decrease as a percentage of total revenue in the future. Barter revenue is not a
source of cash available to fund our operations. 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.
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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 of approximately four hours 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 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 THIS INFORMATION AGAINST SECURITY BREACHES WE MAY LOSE CUSTOMERS.
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. We believe that
maintaining the trust of
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our customers is important for us to be able to grow our business and,
therefore, we believe that any damage to our reputation or liability arising
from one or more security breaches could adversely affect our business, results
of operations and the market price of our common stock.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE TO SUPPORT OUR GROWTH AND SUCH
ADDITIONAL FINANCING MAY NOT BE AVAILABLE TO US.
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, as we continue our efforts to grow our business in
the rapidly changing and highly competitive market for Internet-based healthcare
products and services, 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 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, in turn, our products and services,
obsolete and unmarketable or require us to make significant unanticipated
investments in research and development to upgrade our systems in order to
maintain the marketability of our products. 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, particularly in light of the rapid technological changes in the
Internet industry generally and the highly competitive market in which we
operate, our business, results of operations and 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
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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."
WE MAY BE SUBJECT TO LIABILITY 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 because the quality of our content is important in attracting
online users, advertisers and CHOICE customers.
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
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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.
OUR RELATIONSHIP WITH OUR AFFILIATE BLACKWELL SCIENCE MAY GIVE RISE TO CONFLICTS
OF INTEREST.
Blackwell Science and its affiliates own approximately 12.8% of our
outstanding common stock and are our largest customer, accounting for
approximately 36% of our revenue for the three months ended March 31, 1999 and
44% of our revenue for the year ended December 31, 1998. Because of their stock
ownership, our relationship with these entities could give rise to conflicts of
interest. We cannot assure you that Blackwell Science or its affiliates will
continue to do business with us or that their ownership of our common stock will
not influence the terms on which they do business with us in the future.
OUR BUSINESS MAY BE ADVERSELY AFFECTED 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
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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 BE ADVERSELY AFFECTED 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.
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.
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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.
GOVERNMENT REGULATION OF THE INTERNET MAY RESULT IN INCREASED COSTS OF USING THE
INTERNET 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 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
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regarding the use of personal information are introduced or if any regulator
chooses to investigate our privacy practices.
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 the market price of our common stock.
WE MAY BE SUBJECT TO LIABILITY FOR CLAIMS THAT THE DISTRIBUTION OF MEDICAL
INFORMATION TO CONSUMERS CONSTITUTES PRACTICING MEDICINE OVER THE INTERNET.
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 constitutes 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
BECAUSE WE ARE AN INTERNET BASED COMPANY, 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, acquisitions or
industry consolidation;
- 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
adversely affect our business, financial condition and, in turn, the market
price of our common stock.
OUR MANAGEMENT HAS BROAD DISCRETION IN SPENDING THE PROCEEDS OF THIS OFFERING
AND MAY DO SO IN WAYS WITH WHICH OUR STOCKHOLDERS DISAGREE.
Other than the repayment of approximately $2 million of outstanding
indebtedness under a subordinated term loan, we have no specific allocations for
the net proceeds of this offering. We intend to use the remainder of the net
proceeds for general corporate purposes, including working capital, expansion of
our sales and marketing efforts, content development and licensing and
advertising and brand promotion. 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. Because of the number and variability of
factors that determine our use of the net proceeds of this offering, we cannot
assure you that such uses will not vary from our current intentions or that
stockholders will agree with the uses we have chosen. 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 $8.38. 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."
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
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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 and directors
may only be removed for cause. These provisions may limit the ability of holders
of common stock to remove our board of directors through a proxy contest.
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 10 million 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 statute may have the effect of inhibiting
a non-negotiated merger or other business combination.
FUTURE SALES OF LARGE AMOUNTS OF OUR COMMON STOCK HELD BY EXISTING STOCKHOLDERS
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 18,523,264 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>
4,921,429 Date of this prospectus (includes the 4,600,000 shares sold in
this offering)
10,312,301 180 days after the date of this prospectus
3,289,534 At various times thereafter, subject to applicable holding
period requirements
</TABLE>
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
21
<PAGE>
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 ON OUR COMMON STOCK.
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.
22
<PAGE>
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 $45.5 million
($52.6 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 $2,000,000 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 for
general corporate purposes, including working capital, expansion of our sales
and marketing efforts, content development and licensing, advertising and brand
promotion. 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 no present understandings, commitments or agreements with
respect to any potential acquisitions or investments. Further, we have not
determined the amounts we plan to spend on any of the areas listed above 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 additionally 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 $2,000,000 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 obligation... 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 and pro forma; none issued or outstanding pro forma
as adjusted................................................ 682,665 682,665 --
Series B--1,000 shares authorized, issued and outstanding
actual and pro forma; none issued or outstanding pro forma
as adjusted................................................ 2,096,059 2,096,059 --
Series C--1,000 shares authorized, issued and outstanding
actual and pro forma; none issued or outstanding pro forma
as adjusted................................................ 1,256,396 1,256,396 --
Series D--1,667 shares authorized, issued and outstanding
actual and pro forma; none issued or outstanding pro forma
as adjusted................................................ 3,003,018 3,003,018 --
Series E--720,757 shares authorized, issued and outstanding
pro forma; none issued or outstanding pro forma as
adjusted................................................... -- 7,640,000 --
-------------- -------------- --------------
Total redeemable convertible preferred stock............... 7,038,138 14,678,138 --
-------------- -------------- --------------
Common stock and other stockholders' equity (deficit):
Common stock, $.01 par value: 20,000,000 shares authorized
actual and pro forma, 100,000,000 shares authorized pro
forma as adjusted; 5,234,425 shares issued and outstanding
actual and pro forma, 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 10,493,930 70,539,408
Accumulated deficit.............................................. (12,230,404) (19,870,404) (20,417,009)
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) 48,450,353
-------------- -------------- --------------
Total capitalization....................................... $ (644,844) $ 5,195,156 $ 48,695,156
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
24
<PAGE>
DILUTION
The pro forma net tangible book value of HealthGate as of March 31, 1999 was
$3.5 million, or $.25 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 $48.5 million, or $2.62 per share. This represents
an immediate increase in pro forma net tangible book value of $2.37 per share to
existing stockholders and an immediate dilution of $8.38 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................................ $ .25
Increase attributable to the offering........................................................ 2.37
---------
Pro forma net tangible book value per share after the offering................................. 2.62
---------
Net tangible book value dilution per share to new investors in the offering.................... $ 8.38
---------
---------
</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% $ 12,209,274 19.4% $ .88
New Investors......................................... 4,600,000 24.9% 50,600,000 80.6% 11.00
------------ ----- ------------- ----- -----------
Totals.......................................... 18,500,444 100.0% $ 62,809,274 100.0% $ 3.40
------------ ----- ------------- ----- -----------
------------ ----- ------------- ----- -----------
</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 $.83 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)
------ --------- --------- --------- --------- ----------- -----------
Other expense....................... (--) (4) (14) (6) (337) (17) (158)
------ --------- --------- --------- --------- ----------- -----------
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 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
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 $2,000,000 with proceeds from
this offering.
<TABLE>
<CAPTION>
(UNAUDITED)
MARCH 31, 1999
DECEMBER 31, -----------------------------------
----------------------------------------------------- PRO FORMA
1994 1995 1996 1997 1998 ACTUAL PRO FORMA 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 $ 5,942 $ 49,442
Working capital (deficit)............ (2) (216) 585 (867) -- (1,810) 4,030 47,530
Total assets......................... 4 612 1,791 781 2,371 2,219 8,059 51,559
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 14,678 --
Common stock and other stockholders'
equity (deficit)................... (2) (757) (3,740) (6,821) (9,735) (11,381) (11,181) 48,450
</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 an 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 institutions; and (3) other third
party Web sites to which we syndicate content.
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 content. Sponsorship revenue is generally recognized ratably over the
terms of the applicable agreements.
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<PAGE>
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 selling
advertising 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 have
recently introduced new services which makes an evaluation of our business based
on past operating results difficult." Also, see "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>
On June 11, 1999, we entered into a development and distribution agreement
with GE Medical Systems. In connection with this agreement, we plan to issue a
warrant to General Electric Company for the purchase of up to 1,369,200 shares
of our common stock. The warrant will have a term of five years and an exercise
price of $8.25 per share (subject to an adjustment in the event that the initial
public offering price is below $8.25). In the fiscal quarter in which the
warrant is issued, HealthGate expects to record a substantial non-cash expense
for the fair value of the warrant. In addition, HealthGate may be required to
record an incremental non-cash expense to reflect the final value of the
30
<PAGE>
warrant, as determined on the effective date of the offering. The fair value of
this warrant will be determined using an option pricing model. Based on the
current anticipated offering price range, this expense is expected to range from
approximately $11 million to $13.2 million. If the initial public offering price
is above the current anticipated offering price range, this expense will be
higher. See "Business--Strategic Affiliations--Marketing and Distribution
Affiliations."
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 www.healthgate.com Web site and the
establishment of the business, operations and financing of our 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. Advertising, sponsorship and e-commerce
revenue decreased to $146,000 in the three months ended March 31, 1999 from
$276,000 in the three months ended March 31, 1998, due primarily to a decrease
in revenue under barter advertising arrangements to $43,000 in the three months
ended March 31, 1999 from $134,000 in the three months ended March 31, 1998.
This decrease in barter revenue resulted from our continued reduction in
emphasis on barter arrangements and increased focus on selling advertising for
cash. We anticipate that barter revenue will continue to decrease as a
percentage of total revenue in the future. 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
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<PAGE>
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 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. Advertising and sponsorship
revenue decreased to $665,000 in 1998 from $863,000 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 selling advertising for cash. We anticipate that
barter revenue will continue to decrease as a percentage of total revenue in the
future. E-commerce revenue decreased to $283,000 in 1998 from $333,000 in 1997.
This decrease in e-commerce revenue was due primarily to a
32
<PAGE>
decrease of $24,000 in transaction based fees resulting from a decrease in the
number of full text journal transactions and due to a decrease of $26,000 in
subscription revenue attributable to a decrease in the number of subscriptions.
During this time, we elected to provide more content for free through our own
Web sites in order to generate additional advertising revenue by attracting
additional users to our Web sites. 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 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
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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 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 $4,434,000 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
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preferred stock, we paid $300,000 of fees and expenses to a placement agent,
paid $110,000 of other issuance costs 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, other issuance costs 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
of $7,640,000 in the consolidated statement of operations in the period ended
June 30, 1999 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 increase of $617,000 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 increase of $76,000
in prepaid expenses and other current assets, an increase of $120,000 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 in 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.
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We currently anticipate that the net proceeds from this offering, and the
approximately $5.8 million of net cash proceeds from the Series E offering in
April 1999, 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 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. 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
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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.
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
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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 an 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 searching needs.
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 "Healthy Living" Webzines, a
proprietary series of industry recognized consumer health magazines distributed
exclusively through the Web, and have produced Wellness Centers, which are
compilations of selected information from our online libraries 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 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 our enterprise clients, principally hospitals as well as
other institutions, which carry both HealthGate's and the enterprise client's
name; and (3) other third party Web sites to which we syndicate our proprietary
and licensed content under license agreements. In March 1999, our users viewed
approximately 3.76 million content pages on our own Web sites.
We currently engage in the following activities:
- developing co-branded CHOICE Web sites for enterprise clients and
distributing content through these CHOICE Web sites;
- offering banner advertising and sponsorship of discrete portions of our
content libraries to pharmaceutical companies, other healthcare
advertisers and other businesses and organizations;
- providing our activePress-TM- Web publishing services to traditional print
publishers;
- syndicating content to third party Web sites; and
- participating in e-commerce opportunities, including selling articles from
full-text journals, monthly online subscriptions and medical text books.
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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 people searching
for 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 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, which are
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 licensee's Web site 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, products 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 (Boston
medical centers, University School of
publishers and other Medicine)
third parties. - Reuters Medical News
(Reuters Health)
- EMBASE Cardiology
Consultant (Elsevier
Science B.V.)
HealthGate Nine different industry - Healthy Athlete - healthgate.com
recognized 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 - BRITISH JOURNAL OF - Syndicated third
hosted by HealthGate's SURGERY party Web sites
activePress unit for a (Blackwell Science) - healthgate.co.uk
fee.
</TABLE>
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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 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
Professional Postgraduate Services, a division of Physicians World
Communications Group;
- 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 the NEW ENGLAND JOURNAL OF MEDICINE,
published by the Massachusetts Medical Society, and all medical, scientific and
technical journals published by the worldwide publishing units of Blackwell
Science. Through our activePress service, we convert these journals for delivery
through the Internet and provide access to the converted journals by developing
and 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 further distribute our products and services, generate
additional 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 and syndication 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 up to three additional 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. Until the
JOURNAL's enhanced Web site is re-launched, HealthGate users are able to access
the JOURNAL's existing Web site through a link from HealthGate's own Web site.
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
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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 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 our content libraries. 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 AND DISTRIBUTION AFFILIATIONS
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 2,500
hospitals and healthcare institutions worldwide 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 end-user license agreement entered into
between HealthGate and the specific enterprise. We have granted Data General an
exclusive right to resell our CHOICE product to a defined group of its current
customers until December 31, 1999. This exclusive right may be extended if Data
General achieves sales targets, to be determined by mutual agreement, by that
date. Data General has agreed that, during the term of the agreement, it will
not market any other products or services that are
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similar to our CHOICE Web site product. The initial term of our agreement with
Data General runs through June 2001 and is renewable for one additional year by
mutual agreement.
GE MEDICAL SYSTEMS. On June 11, 1999 we entered into a development and
distribution agreement with GE Medical Systems, the medical diagnostic equipment
and services division of General Electric Company. Under the terms of this
agreement, we will develop and host GE Medical Systems branded enhanced versions
of our CHOICE Web site product. GE Medical Systems will have an exclusive
worldwide right to sell these enhanced CHOICE Web sites to hospitals and other
patient care facilities. GE Medical Systems will also have the exclusive right
to sell our CHOICE Web site product to a select group of hospitals and other
patient care facilities. In addition, GE Medical Systems will have the
non-exclusive right to sell our CHOICE Web site product to other healthcare
institutions, subject, in certain cases, to our prior consent. GE Medical
Systems has a worldwide customer base of hospitals and other patient care
institutions and a sales and marketing organization dedicated to healthcare. GE
Medical Systems' customer base presents an attractive audience for both our own
CHOICE Web sites and the enhanced GE Medical Systems branded versions of our
CHOICE Web sites. Revenue derived from CHOICE Web sites sold by GE Medical
Systems will be shared by GE Medical Systems and us. The initial term of our
development and distribution agreement with GE Medical Systems is one year and
is renewable annually by mutual agreement. This agreement will become effective
upon the issuance of the warrant to General Electric Company described below.
In connection with the development and distribution agreement, we plan to
issue to General Electric Company a warrant for the purchase of up to 1,369,200
shares of our common stock. The warrant will have a term of five years and an
exercise price of $8.25 per share (subject to an adjustment in the event that
the initial public offering price is below $8.25). The shares of common stock
issuable under the warrant will have registration rights similar to the
registration rights provided to GE Capital Equity Investments, Inc. and
Blackwell Science. See "Shares Eligible for Future Sale-- Registration Rights."
The issuance of the warrant and the grant of related registration rights are
subject to receipt of consents and waivers from existing stockholders and
warrantholders with registration rights.
In the fiscal quarter in which the warrant is issued, we expect to record a
substantial non-cash expense for the fair value of the warrant. In addition, we
may be required to record an incremental non-cash expense to reflect the final
value of the warrant, as determined on the effective date of this offering. The
fair value of this warrant will be determined using an option pricing model.
Based on the currently anticipated offering price range, this expense is
expected to range from approximately $11 million to $13.2 million. If the
initial public offering price is above the current anticipated offering price
range, this expense will be higher.
SYNDICATION AFFILIATIONS
We have formed strategic syndication affiliations with five high-traffic,
health-related Web sites to distribute portions of our content libraries through
licensing agreements. Our present syndication 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.
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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>
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 Web site by the end of 1999.
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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
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.
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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 and e-commerce opportunities for their Web sites. The revenue from
these opportunities is allocated between the CHOICE client and us.
As of June 11, 1999, we have established 13 co-branded CHOICE Web sites
providing health information to hospitals, including Swedish Medical Center
(Seattle, Washington), St. Joseph's Hospital, a unit of Carondelet Health
Systems (Kansas City, Missouri), Hallmark Health (Malden, Massachusetts) and
Winchester Hospital (Winchester, Massachusetts), and one university, Indiana
State University (Terre Haute, Indiana). 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.
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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, illnesses and conditions.
Health-conscious consumers can access HealthGate's 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 or e-commerce 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 that we develop and
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 development, 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 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 offered by 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 additional
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 process, identifying leads through telemarketing and supporting
our customers. The inside sales group's
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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 to their customer base of approximately 1,200
hospitals.
On June 11, 1999 we entered into a development and distribution relationship
with GE Medical Systems pursuant to which GE Medical Systems will be able to
sell our CHOICE Web site product and GE Medical Systems branded enhanced
versions of our CHOICE Web site product through its worldwide sales force into
its worldwide customer base of hospitals and other patient care facilities. See
"--Strategic Affiliations--Marketing and Distribution 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 a portion 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
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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.
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
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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.
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,
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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 each of
our target markets. See "Risk Factors--We face intense competition in providing
our Internet-based healthcare information products and services and we may not
be able to compete effectively."
We syndicate portions of our content to other competing health related Web
sites, including WebMD and Inteli-health. We believe that the benefits of
content syndication, including additional traffic to the HealthGate Network,
increased awareness of the HealthGate brand and additional advertising and
sponsorship and e-commerce opportunities, outweigh the disadvantages of a
potential increase in competition that may result from our content syndication
to these competitors. See "Business--HealthGate's Products and Services--Content
Syndication."
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 may result in increased costs of using the Internet which could
adversely affect our business," "--Privacy-related regulation of the Internet
could adversely affect our business," "--Tax treatment of companies engaged in
Internet commerce may adversely affect the Internet industry and our company"
and "--We may be subject to liability for claims that the distribution of
medical information to consumers constitutes practicing medicine on the
Internet."
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
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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 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 May 31, 1999, we had a total of 62 full-time employees. Of these
employees, 33 serve in research and development, 8 serve in administration and
21 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 May 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 Capital Equity 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 with the closing of 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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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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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 31, 1999, options for a total of 2,118,919 shares of common stock
are outstanding under the 1994 Stock Option Plan. In addition, 28,958 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
Equity Investments for an aggregate consideration of $6,250,000 in cash.
In June 1999, we entered into a development and distribution agreement with
GE Medical Systems pursuant to which we will develop GE Medical Systems branded
enhanced versions of our CHOICE Web site product. In connection with this
agreement, we plan to issue to General Electric Company a warrant for the
purchase of up to 1,369,200 shares of our common stock. The warrant will have a
term of five years and an exercise price of $8.25 per share (subject to an
adjustment in the event that the initial public offering price is below $8.25).
The issuance of the warrant is subject to receipt of consents and waivers from
our existing stockholders and warrantholders. GE Capital Equity Investments,
Inc., a stockholder of HealthGate is an affiliate of General Electric Company.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of May 31, 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)......................................... 2,492,071 17.9% 13.5%
120 Long Ridge Road
Stamford, CT 06927
William S. Reece (3)........................................................... 2,403,630 17.1 12.9
Blackwell Science, Ltd. (4).................................................... 2,364,877 16.9 12.7
Oxney Mead, Oxford
OX2 0EL, United Kingdom
Jonathan J. G. Conibear (5).................................................... 2,364,877 16.9 12.7
Chris H. Horgen (6)............................................................ 2,145,349 15.4 11.6
Nichols Research Corporation................................................... 2,107,317 15.1 11.4
4040 Memorial Parkway, S.
Huntsville, AL 35802
Barry M. Manuel, M.D. (7)...................................................... 1,394,758 10.0 7.5
65 Wellesley Road
Belmont, MA 02478
Rick Lawson (8)................................................................ 958,440 6.9 5.2
David Friend (9)............................................................... 494,116 3.5 2.7
Tina M. H. Blair, M.D. (9)..................................................... 397,533 2.8 2.1
Edson D. de Castro (10)........................................................ 150,078 1.1 *
Mark A. Israel (11)............................................................ 93,105 *
Hamid Tabatabaie (12).......................................................... 62,527 *
Executive officers and directors as a group (8 persons) (13)................... 8,111,215 60.0% 42.5%
</TABLE>
- ------------------------
* Less than one percent of outstanding shares.
(1) Percentage ownership is based on 13,923,264 shares outstanding as of May 31,
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) GE Capital Equity Investments, Inc. is a wholly-owned subsidiary of General
Electric Capital Corporation, and GE Capital Equity shares beneficial
ownership with General Electric Capital Corporation and GE Medical Systems,
an operating unit of General Electric Company, with respect to all shares
held of record by GE Capital Equity. Does not include 1,369,200 shares
issuable pursuant to a warrant to be granted to General Electric Company in
connection with a development and distribution arrangement with GE Medical
Systems. See "Business--Strategic Affiliations."
(3) Includes 144,450 shares of common stock issuable upon the exercise of stock
options.
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<PAGE>
(4) 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.
(5) 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.
(6) 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.
(7) 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.
(8) Includes 45,640 shares of common stock issuable upon exercise of stock
options.
(9) Includes 38,031 shares of common stock issuable upon exercise of stock
options.
(10) Includes 111,055 shares of common stock issuable upon exercise of stock
options.
(11) Includes 70,285 shares of common stock issuable upon exercise of stock
options.
(12) Includes 62,527 shares of common stock issuable upon exercise of stock
options.
(13) Includes 570,874 shares of common stock issuable upon exercise of stock
options.
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<PAGE>
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 May 31, 1999, there were outstanding:
- 5,257,245 shares of common stock, held by 17 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 18,523,264
shares of common stock outstanding, assuming no exercise of options to acquire
2,372,677 additional shares of common stock or warrants to purchase 1,918,751
additional shares of common stock that are outstanding as of the date of this
prospectus (including the warrant we plan to issue to General Electric Company
for the purchase of up to 1,369,200 shares of our common stock in connection
with our development and distribution agreement with GE Medical Systems).
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 100,000,000 shares of common stock, $.01 par value per share, and 10,000,000
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
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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, 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, may be exercised at
any time and expire in March 2008. Warrants to purchase 24,919 shares have an
exercise price of $2.51 per share, may be exercised at any time after April 20,
2000 and expire on April 21, 2002. 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."
Additionally, in connection with a development and distribution agreement
with GE Medical Systems, HealthGate plans to issue to General Electric Company a
warrant for the purchase of up to 1,369,200 shares of common stock with an
exercise price of $8.25 per share (subject to an adjustment in the event that
the initial public offering price is below $8.25). The holder of this warrant
will also have registration rights covering the shares of common stock issuable
under the warrant. See "Business-- Strategic Affiliations--Marketing and
Distribution Affiliations" and "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.
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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 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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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 18,523,264 shares of common
stock outstanding, including 8,666,019 shares of common stock issuable upon
conversion of our outstanding preferred stock (assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options and
warrants). 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 13,923,264 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 completion of this offering, 321,429 of the restricted securities will
become eligible for sale in the public market pursuant to Rule 144. Upon the
expiration of the lock-up agreements entered into by us, our executive officers
and directors and all principal stockholders and most of our other stockholders
in connection with this offering, 10,312,301 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 3,289,534 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 185,233
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 9,187,910 shares of
common stock have the right to require registration of their shares under
certain circumstances. However, holders of 8,991,816 shares of this common stock
have entered into lock-up agreements with respect to these shares, 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 31, 1999, options to purchase an aggregate of 1,239,769 shares of
common stock were fully vested. Holders of fully vested options to purchase
76,062 shares of common stock have the right to require registration of their
shares under certain circumstances. Of the total shares issuable pursuant to
vested options, 1,057,678 are subject to 180-day lock-up agreements. As of May
31, 1999, options to purchase an additional 1,132,908 shares of common stock
were outstanding, but are subject to future vesting, and an additional 818,723
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
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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
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.
WARRANTS
As of May 31, 1999, warrants to purchase 524,632 shares of common stock were
exercisable. In addition, outstanding warrants to purchase 24,919 shares of
common stock will become exercisable on April 21, 2000. All shares issuable
under outstanding warrants are subject to 180-day lock-up agreements. In
connection with our agreement to issue a warrant to General Electric Company for
1,369,200 shares of our common stock, General Electric Company has agreed to
enter into a similar 180-day lock-up agreement. We have granted registration
rights with respect to the 524,632 shares of common stock issuable under one of
the outstanding warrants and we expect to grant registration rights to General
Electric Company in connection with its warrant for 1,369,200 shares. See
"Business-- Strategic Affiliation--Marketing and Distribution Affiliations" and
"Registration Rights."
LOCK-UP AGREEMENTS
HealthGate, all of our executive officers and directors, all principal
stockholders and other existing stockholders who, upon the closing of this
offering, will beneficially own an aggregate of 13,601,835 outstanding shares of
common stock, together with holders of options to purchase 1,990,442 shares of
common stock and holders of warrants to purchase 549,551 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.
In addition, General Electric Company has agreed to enter into a similar
180-day lock-up agreement with respect to the 1,369,200 shares of common stock
issuable upon exercise of a warrant to be issued to it in connection with the
development and distribution agreement with GE Medical Systems.
REGISTRATION RIGHTS
We have granted registration rights to most of our existing stockholders
covering:
- 521,891 shares of outstanding common stock;
74
<PAGE>
- 5,376,485 shares of common stock issuable upon conversion of the Series
Stock;
- 91,280 shares of common stock issuable upon exercise of outstanding
options; 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"). Additionally we expect to
enter into a registration agreement with General Electric Company granting
registration rights with respect to 1,369,200 shares of common stock issuable
upon exercise of a warrant. See "Business-- Strategic Affiliations--Marketing
and Distribution Affiliations." The registration rights relating to the
securities issuable upon exercise of this warrant are expected to be
substantially similar to the registration rights of the GE-Blackwell Securities
described below.
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 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.
75
<PAGE>
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, at the request of HealthGate, have reserved for sale to
HealthGate employees, friends and family members of employees and to certain
other persons, at the initial public offering price, up to five percent of the
shares of common stock to be sold in this offering. The number of shares
available for sale to the general public will be reduced to the extent that any
reserved shares are purchased. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same basis as the other
shares offered hereby.
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 executive officers, all principal stockholders
and other existing stockholders who hold an aggregate of 13,601,835 shares,
together with the holders of options to purchase 1,990,442 shares of common
stock and holders of warrants to purchase 549,551 shares of common stock, have
agreed with the underwriters that for a period of 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. In addition,
General Electric Company has agreed to enter into a similar 180-day lock-
76
<PAGE>
up agreement with respect to the 1,369,200 shares of common stock issuable upon
exercise of a warrant to be issued to them in connection with the development
and distribution agreement with GE Medical Systems. See "Shares Eligible for
Future Sale--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 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 $1,558,000.
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.
77
<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.
78
<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 June 11, 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
June 11, 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, respectively, and $185,000 at March 31, 1999
(unaudited), and net of allowance for doubtful accounts
of $3,500 and $20,000 at December 31, 1997 and 1998,
respectively, and $26,170 at March 31, 1999
(unaudited)............................................. 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) actual;
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,
respectively, and $250,300
(unaudited) and $218,500 (unaudited)
in 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 period... 104,820 1,155,726 29,045 29,045 960,831
------------- ------------- ------------- ------------- -------------
Cash and cash equivalents, end of period......... $ 1,155,726 $ 29,045 $ 960,831 $ 1,956,499 $ 101,724
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
HealthGate paid cash for interest of approximately $24,000, $28,000 and $242,000
for the years ended December 31, 1996, 1997 and 1998, respectively, and $17,000
unaudited and $136,000 unaudited for the three months ended March 31, 1998 and
1999, respectively.
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
HealthGate entered into capital leases for certain computer equipment totaling
approximately $87,000, $71,000 and $577,000 during the years ended December 31,
1996, 1997 and 1998, respectively, and $49,000 unaudited and $135,000 unaudited
during the three months ended March 31, 1998 and 1999, respectively.
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
shares of redeemable convertible preferred stock outstanding at March 31, 1999
(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. Including the Series E preferred stock issued in April 1999
(Note 4), all outstanding shares of redeemable convertible preferred stock will
convert into 8,666,019 shares of common stock upon the closing of HealthGate's
anticipated initial public offering.
F-9
<PAGE>
HEALTHGATE DATA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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
F-10
<PAGE>
HEALTHGATE DATA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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, respectively, and $81,361 (unaudited) and
$104,885 (unaudited) for the three months ended March 31, 1998 and 1999,
respectively, of which $132,055, $248,217 and $186,475 in 1996, 1997, and 1998,
respectively, and $48,004 (unaudited) and $52,543 (unaudited) 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,
respectively, and $656,979 (unaudited) at March 31, 1999.
F-11
<PAGE>
HEALTHGATE DATA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 174,729 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 1,391,500,
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, paid other issue costs of $110,000, and
issued 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, other issue costs and
warrant value will be reflected as a
F-14
<PAGE>
HEALTHGATE DATA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
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 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 $7,640,000, 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................... 562,285 570,957 100,751
--------- --------- ---------
--------- --------- ---------
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)
5. COMMON STOCK AND OTHER STOCKHOLDERS' DEFICIT (CONTINUED)
SUBSEQUENT ISSUANCE OF WARRANT
On June 11, 1999, HealthGate entered into a development and distribution
agreement with GE Medical Systems, under which HealthGate agreed to issue to
General Electric Company or a General Electric Company affiliate a warrant to
purchase up to 1,369,200 shares of HealthGate's common stock. The warrant will
have a term of five years and an exercise price per share of $8.25 (subject to
potential adjustments for certain equity offerings subsequent to the warrant's
issuance and other events). The fair value of this warrant, as determined using
an option pricing model, will be recorded as a non-cash expense in the fiscal
quarter in which the warrant is issued. In addition, HealthGate may be required
to record an incremental non-cash expense in a subsequent fiscal quarter to
reflect the final value of the warrant, as determined on the effective date of
HealthGate's initial public offering offering or another applicable event.
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
F-18
<PAGE>
HEALTHGATE DATA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
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.
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,
F-19
<PAGE>
HEALTHGATE DATA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS (CONTINUED)
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.
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>
[THE INSIDE BACK COVER CONTAINS A DIAGRAM ENTITLED
"HEALTHGATE-REGISTERED TRADEMARK-: THE GATEWAY TO HEALTH INFORMATION" SHOWING
CONTENT SOURCES, THE HEALTHGATE NETWORK AND PROFESSIONALS, PATIENTS AND
CONSUMERS.]
<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
NASD filing fee......................................................... 6,000
Nasdaq listing fee...................................................... 94,000
Blue Sky fee and expenses............................................... 5,000
Printing and engraving expenses......................................... 200,000
Legal fees and expenses................................................. 650,000
Auditors' accounting fees and expenses.................................. 450,000
Transfer Agent and Registrar fees....................................... 10,000
Miscellaneous expenses.................................................. 125,352
---------
Total............................................................... $1,558,000
</TABLE>
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 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
II-1
<PAGE>
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 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
II-2
<PAGE>
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.
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.
II-3
<PAGE>
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 228 shares of our common stock for an
aggregate consideration of $140 in cash to a former employee who exercises 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 228 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 5,590 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 91 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 24,919 shares of our common stock for
$2.51 per share and reimbursed them $50,000 in cash for their out of pocket
expenses. In addition, we incurred $110,000 in other issuance-related expenses.
On May 14, 1999, we issued and sold 22,820 shares of our common stock for an
aggregate consideration of $9,328 in cash to an executive officer who exercised
an outstanding stock option.
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 Form of 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.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
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.
10.25* Web Site Hosting Agreement dated October 30, 1998 by and between the Registrant and Endeavor
Technologies, Inc.
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- ------------------------------------------------------------------------------------------------------
<C> <S>
10.26* Continuing Medical Education Programs License Agreement dated as of April 1, 1996 between the
Registrant and the Trustees of Boston University.
10.27*** Development and Distribution Agreement dated as of June 11, 1999 between Registrant and GE Medical
Systems (excluding Exhibits).
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.
** Previously filed with the Registrant's Amendment No. 1 to Registration
Statement on Form S-1 filed on May 21, 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
II-7
<PAGE>
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-8
<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 11th day of June, 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 June 11, 1999
William S. Reece President (Principal
executive officer)
Chief Financial Officer and
/s/ MARY B. MILLER Treasurer (Principal
- ------------------------------ financial and accounting June 11, 1999
Mary B. Miller officer)
* /s/ TINA M. H. BLAIR Director
- ------------------------------ June 11, 1999
Tina M. H. Blair, M.D.
* /s/ JONATHAN J. G. Director
CONIBEAR
- ------------------------------ June 11, 1999
Jonathan J. G. Conibear
* /s/ EDSON D. DE CASTRO Director
- ------------------------------ June 11, 1999
Edson D. de Castro
* /s/ DAVID FRIEND Director
- ------------------------------ June 11, 1999
David Friend
* /s/ CHRIS H. HORGEN Director
- ------------------------------ June 11, 1999
Chris H. Horgen
/s/ WILLIAM S. REECE
----------------------------------------
William S. Reece
*By ATTORNEY-IN-FACT
II-9
<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 Form of 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.
10.27*** Development and Distribution Agreement dated as of June 11, 1999 between Registrant and GE Medical
Systems (excluding Exhibits).
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)
</TABLE>
<PAGE>
<TABLE>
<C> <S>
24.1* Power of Attorney (contained on signature page of the 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 Registrant's Registration Statement on Form S-1, filed
with the Securities and Exchange Commission on April 23, 1999.
** Previously filed with the Registrant's Amendment No. 1 to Registration
Statement on Form S-1 filed on May 21, 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 1.1
4,600,000 SHARES
HEALTHGATE DATA CORP.
COMMON STOCK
UNDERWRITING AGREEMENT
June ___, 1999
SG COWEN SECURITIES CORPORATION
BANC OF AMERICA SECURITIES LLC
VOLPE BROWN WHELAN & COMPANY, LLC
As Representatives of the several Underwriters named in Schedule A
c/o SG Cowen
Financial Square
New York, New York 10005
Dear Sirs:
1. INTRODUCTORY. HealthGate Data Corp., a Delaware corporation (the
"Company"), proposes to issue and sell, pursuant to the terms of this
Agreement, to the several Underwriters named in Schedule A hereto (the
"Underwriters") 4,600,000 shares of Common Stock, $0.01 par value (the "Firm
Stock") of the Company. SG Cowen Securities Corporation ("SG Cowen"), Banc of
America Securities LLC and Volpe Brown Whelan & Company, LLC shall act as
representatives (the "Representatives") of the several Underwriters.
The Company also proposes to issue and sell to the several
Underwriters up to an additional 690,000 shares of Common Stock (the "Optional
Stock"), if and to the extent that the Representatives shall have determined to
exercise on behalf of the Underwriters, the right to purchase such shares of
common stock upon the terms and conditions set forth in Section 3 hereof The
Firm Stock and the Optional Stock are hereinafter collectively referred to as
the "Common Stock".
The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement, including a prospectus,
relating to the Common Stock. The registration statement on Form S-1 (File No.
333-76899) as amended at the time it becomes effective, including the
information (if any) deemed to be part of the registration statement at the
<PAGE>
time of effectiveness pursuant to Rule 430A under the Securities Act of 1933, as
amended (the "Securities Act") and the rules and regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the "Commission")
thereunder, is hereinafter referred to as the Registration Statement. The term
"Registration Statement" as used in this Agreement shall also include any
registration statement relating to the Common Stock that is filed and declared
effective pursuant to Rule 462(b) under the Securities Act. The prospectus in
the respective form first used to confirm sales of the Common Stock is
hereinafter referred to as the "Prospectus". The term "Prospectus" as used in
this Agreement means the prospectus in the form included in the Registration
Statement, or, if prospectuses that meet the requirements of Section 10(a) of
the Securities Act are delivered pursuant to Rule 434 under the Securities Act,
then (i) the term "Prospectus" as used in this Agreement means the "prospectus
subject to completion" (as such term is defined in Rule 434(g) under the
Securities Act) as supplemented by (a) the addition of Rule 430A information or
other information contained in the form of prospectus delivered pursuant to Rule
434(b)(2) under the Securities Act or (b) the information contained in the term
sheets described in Rule 434(b)(3) under the Securities Act, and (ii) the date
of such prospectuses shall be deemed to be the date of the term sheets. The term
"Pre-effective Prospectus" as used in this Agreement means the prospectus
subject to completion in the form included in the Registration Statement at the
time of the initial filing of the Registration Statement with the Commission,
and as such prospectus shall have been amended from time to time prior to the
date of the Prospectus.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to, and agrees with, the several Underwriters that:
(a) The Registration Statement with respect to the Common
Stock, including any Pre-effective Prospectus, copies of which have heretofore
been delivered to you, has been carefully prepared by the Company in conformity
with the requirements of the Securities Act and has been filed with the
Commission under the Securities Act.
(b) The Commission has not issued or threatened to issue any
order preventing or suspending the use of any Pre-effective Prospectus, and no
proceedings for such purpose are pending before or threatened by the Commission;
(c) At its date of issue, each Pre-effective Prospectus
conformed in all material respects with the requirements of the Securities Act
and did not include any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading and, when the Registration Statement becomes effective and at all
times subsequent thereto up to and including each of the Closing Dates (as
hereinafter defined), the Registration Statement and the Prospectus and any
amendments or supplements thereto contained and will contain all material
statements and information required to be included therein by the Securities Act
and conformed and will conform in all material respects to the requirements of
the Securities Act; the Registration Statement and any amendment thereto, did
not include or will not include any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
2
<PAGE>
the statements therein, not misleading, and the Prospectus, and any amendment or
supplement thereto, did not include or will not include any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; provided, however, that the foregoing
representations, warranties and agreements shall not apply to information
contained in or omitted from any Pre-effective Prospectus or the Registration
Statement or the Prospectus or any such amendment or supplement thereto in
reliance upon, and in conformity with, written information furnished to the
Company by or on behalf of any Underwriter, directly or through you,
specifically for use in the preparation thereof; there is no license, lease,
contract, agreement or document required to be described in the Registration
Statement or Prospectus or to be filed as an exhibit to the Registration
Statement which is not described or filed therein as required; and all
descriptions of any such licenses, leases, contracts, agreements or documents
contained in the Registration Statement are accurate and complete descriptions
of such documents in all material respects.
(d) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, and except as set forth
or contemplated in the Prospectus, neither the Company nor any of its
subsidiaries has sustained material loss or interference with its business from
fire, explosion, flood or other calamity, whether or not covered by insurance,
or from any labor dispute or court or governmental action, order or decree, nor
incurred any liabilities or obligations, direct or contingent, nor entered into
any transactions not in the ordinary course of business, and there has not been
any material adverse change, or any development involving a prospective material
adverse change in or affecting the condition (financial or otherwise), earnings,
business, management, prospects, net worth or results of operations of the
Company and its subsidiaries considered as a whole, or any change in the capital
stock, short-term or long-term debt of the Company and its subsidiaries
considered as a whole.
(e) The financial statements, together with the related notes
and schedules, set forth in the Prospectus and elsewhere in the Registration
Statement fairly present, on the basis stated in the Registration Statement, the
financial position and the results of operations and changes in financial
position of the Company at the respective dates or for the respective periods
therein specified. Such statements and related notes and schedules have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis except as may be set forth in the Prospectus. The selected
financial and statistical data set forth in the Prospectus fairly present, on
the basis stated in the Registration Statement, the information set forth
therein.
(f) The pro forma financial statements and the related notes
thereto included in the Registration Statement and the Prospectus present fairly
the information shown therein, have been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial statements
and have been properly compiled on the bases described therein, and the
assumptions used in the preparation thereof are reasonable and the adjustments
used therein are appropriate to give effect to the transactions and
circumstances referred to therein.
3
<PAGE>
(g) PricewaterhouseCoopers LLP, who have expressed their
opinion on the audited financial statements and related schedules included in
the Registration Statement and the Prospectus, are independent public
accountants as required by the Securities Act and the Rules and Regulations.
(h) The Company and each of its subsidiaries have been duly
organized and are validly existing and in good standing as corporations under
the laws of their respective jurisdictions of organization, with power and
authority (corporate and other) to own or lease their properties and to conduct
their business as described in the Prospectus; the Company and each of its
subsidiaries are in possession of and operating in compliance with all grants,
authorizations, licenses, permits, easements, consents, certificates and orders
required for the conduct of its business, all of which are valid and in full
force and effect; and the Company and each of such subsidiaries are duly
qualified to do business and in good standing as foreign corporations in all
other jurisdictions where their ownership or leasing of properties or the
conduct of their business requires such qualification. The Company and each of
its subsidiaries have all requisite power and authority, and all necessary
consents, approvals, authorizations, orders, registrations, qualifications,
licenses and permits of and from all public regulatory or governmental agencies
and bodies to own, lease and operate its properties and conduct its business as
now being conducted and as described in the Registration Statement and the
Prospectus, and no such consent, approval, authorization, order, registration,
qualification, license or permit contains a materially burdensome restriction
not adequately disclosed in the Registration Statement and the Prospectus. The
Company owns or controls, directly or indirectly, only the following
corporations: HealthGate Europe Limited and HealthGate Acquisition Corp.
(i) The Company's authorized and outstanding capital stock is
on the date hereof, and will be on the Closing Date, as set forth under the
heading "Capitalization" in the Prospectus; the outstanding shares of common
stock of the Company conform to the description thereof in the Prospectus and
have been duly authorized and validly issued and are fully paid and
nonassessable and have been issued in compliance with all federal and state
securities laws and were not issued in violation of or subject to any preemptive
rights or similar rights to subscribe for or purchase securities and conform to
the description thereof contained in the Prospectus. Except as disclosed in and
or contemplated by the Prospectus and the financial statements of the Company
and related notes thereto included in the Prospectus, the Company does not have
outstanding any options or warrants to purchase, or any preemptive rights or
other rights to subscribe for or to purchase any securities or obligations
convertible into, or any contracts or commitments to issue or sell, shares of
its capital stock or any such options, rights, convertible securities or
obligations, except for options granted subsequent to the date of information
provided in the Prospectus pursuant to the Company's employee and stock option
plans as disclosed in the Prospectus. The description of the Company's stock
option and other stock plans or arrangements, and the options or other rights
granted or exercised thereunder, as set forth in the Prospectus, accurately and
fairly presents the information required to be shown with respect to such plans,
arrangements, options and rights. All outstanding shares of capital stock of
each subsidiary have been duly authorized and validly issued, and are fully
4
<PAGE>
paid and nonassessable and are owned directly by the Company free and clear of
any liens, encumbrances, equities or claims.
(j) The Common Stock to be issued and sold by the Company to
the Underwriters hereunder has been duly and validly authorized and, when issued
and delivered against payment therefor as provided herein, will be duly and
validly issued, fully paid and nonassessable and free of any preemptive or
similar rights and will conform to the description thereof in the Prospectus.
(k) Except as set forth in the Prospectus, there are no legal
or governmental proceedings pending to which the Company or any of its
subsidiaries is a party or of which any property of the Company or any
subsidiary is subject, which, if determined adversely to the Company or any such
subsidiary, might individually or in the aggregate (i) prevent or adversely
affect the transactions contemplated by this Agreement, (ii) suspend the
effectiveness of the Registration Statement, (iii) prevent or suspend the use of
the Pre-effective Prospectus in any jurisdiction or (iv) result in a material
adverse change in the current or future condition (financial or otherwise),
properties, business, management prospects, net worth or results of operations
of the Company and its subsidiaries considered as a whole and there is no valid
basis for any such legal or governmental proceeding; and to the best of the
Company's knowledge no such proceedings are threatened or contemplated against
the Company or any subsidiary by governmental authorities or others. The Company
is not a party nor subject to the provisions of any material injunction,
judgment, decree or order of any court, regulatory body or other governmental
agency or body. The description of the Company's litigation under the heading
"Legal Matters" in the Prospectus is true and correct and complies with the
Rules and Regulations.
(l) The execution, delivery and performance of this Agreement
and the consummation of the transactions herein contemplated (A) will not result
in any violation of the provisions of the certificate of incorporation, by-laws
or other organizational documents of the Company or its subsidiaries, or any
law, order, rule or regulation of any court or governmental agency or body
having jurisdiction over the Company or its subsidiaries or any of their
properties or assets, (B) will not conflict with or result in a breach or
violation of any of the terms or provisions of or constitute a default under any
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which it or any of its properties is or may be bound, the Certificate of
Incorporation, By-laws or other organizational documents of the Company or any
of its subsidiaries, or any law, order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Company or any of its
subsidiaries or any of their properties or will result in the creation of a
lien.
(m) No consent, approval, authorization or order of any court
or governmental agency or body is required for the execution, delivery and
performance of this Agreement by the Company and the consummation of the
transactions contemplated hereby, except such as may be required by the National
Association of Securities Dealers, Inc. (the "NASD") or under the Securities Act
or the Securities Exchange Act of 1934, as amended (the "Exchange Act") or the
securities or
5
<PAGE>
"Blue Sky" laws of any jurisdiction in connection with the purchase and
distribution of the Common Stock by the Underwriters.
(n) The Company has the full corporate power and authority to
enter into this Agreement and to perform its obligations hereunder (including to
issue, sell and deliver the Common Stock), and this Agreement has been duly and
validly authorized, executed and delivered by the Company and is a valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms, except to the extent that rights to indemnity and contribution
hereunder may be limited by federal or state securities laws or the public
policy underlying such laws.
(o) The Company and its subsidiaries are in all material
respects in compliance with, and conduct their business in conformity with, all
applicable federal, state, local and foreign laws, rules and regulations of any
court or governmental agency or body; to the knowledge of the Company, otherwise
than as set forth in the Registration Statement and the Prospectus, no
prospective change in any of such federal or state laws, rules or regulations
has been adopted which, when made effective, would have a material adverse
effect on the operations of the Company and its subsidiaries.
(p) Except for (i) an amendment to the Company's 1997 federal
tax return which the Company plans to file and (ii) the Company's filing of a
request for an extension with respect to the Company's 1998 federal tax return,
the Company and its subsidiaries have filed all necessary federal, state, local
and foreign income, payroll, franchise and other tax returns and have paid all
taxes shown as due thereon or with respect to any of their properties, and there
is no tax deficiency that has been, or to the knowledge of the Company is likely
to be, asserted against the Company or any of its subsidiaries or any of their
respective properties or assets that would adversely affect the financial
position, business or operations of the Company and its subsidiaries.
(q) No person or entity has the right to require registration
of shares of Common Stock or other securities of the Company because of the
filing or effectiveness of the Registration Statement or otherwise, except for
persons and entities who have expressly waived such right or who have been given
proper notice and have failed to exercise such right within the time or times
required under the terms and conditions of such right.
(r) Neither the Company nor any of its officers, directors or
affiliates has taken or will take, directly or indirectly, any action designed
or intended to stabilize or manipulate the price of any security of the Company,
or which caused or resulted in, or which might in the future reasonably be
expected to cause or result in, stabilization or manipulation of the price of
any security of the Company.
(s) The Company has provided you with all financial statements
since 1994 to the date hereof that are available to the officers of the Company,
including financial statements for the months of January, February and March of
1999.
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(t) The Company and its subsidiaries own or possess the right
to use all patents, trademarks (including "ReADER"), trademark registrations,
service marks (including "HealthGate", "HealthGate Data" and "MedGate"), service
mark registrations, trade names, copyrights, licenses, inventions, trade secrets
and rights described in the Prospectus as being owned by it or necessary for the
conduct of their respective businesses (and the Company has trademark
registration applications pending for the trademarks "CHOICE" and "activePress",
and for the HealthGate logo design), and the Company is not aware of any claim
to the contrary or any challenge by any other person to the rights of the
Company and its subsidiaries with respect to the foregoing. To the best of the
Company's knowledge, the Company's business as now conducted and as proposed to
be conducted does not and will not infringe or conflict with in any material
respect patents, trademarks, service marks, trade names, copyrights, trade
secrets, licenses or other intellectual property or franchise right of any
person. Except as described in the Prospectus, no claim has been made against
the Company alleging the infringement by the Company of any patent, trademark,
service mark, trade name, copyright, trade secret, license in or other
intellectual property right or franchise right of any person.
(u) The Company and its subsidiaries have performed all
material obligations required to be performed by them under all contracts
required by Item 601(b)(10) of Regulation S-K under the Securities Act to be
filed as exhibits to the Registration Statement, and neither the Company nor any
of its subsidiaries nor any other party to such contract is in default under or
in breach of any such obligations. Neither the Company nor any of its
subsidiaries has received any notice of such default or breach.
(v) The Company has reviewed its operations and that of its
subsidiaries to evaluate the extent to which the business or operations of the
Company or any of its subsidiaries will be affected by the Year 2000 Problem
(that is, any significant risk that computer hardware or software applications
used by the Compny and its subsidiaries will not, in the case of dates or time
periods occurring after December 31, 1999, function at least as effectively as
in the case of dates or time periods occurring prior to January 1, 2000); as a
result of such review, (i) the Company has no reason to believe, and does not
believe, that (A) there are any issues related to the Company's preparedness to
address the Year 2000 Problem that are of a character required by described or
referred to in the Registration Statement or Prospectus which have not be
accurately described in the Registration Statement of Prospectus and (B) the
Year 2000 Problem will have any material adverse change, or any development
involving a prospective material adverse change in or affecting the condition
(financial or otherwise), earnings, business, management, prospects, net worth
or results of operations of the Company and its subsidiaries considered as a
whole, or result in any material loss or interference with the business or
operations of the Company and its subsidiaries, taken as a whole; and (ii) the
Company reasonably believes, after due inquiry, that the licensors, internet
service providers, suppliers, vendors, subscribers or other material third
parties used or served by the Company and such subsidiaries are addressing or
will address the Year 2000 Problem in a timely manner, except to the extent that
a failure to address the Year 2000 Problem by any licensor, internet service
provider, supplier, vendor, subscriber or material third party would not have
any material adverse change, or any development involving a prospective material
adverse change in or
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affecting the condition (financial or otherwise), earnings, business,
management, prospects, net worth or results of operations of the Company and its
subsidiaries considered as a whole.
(w) The Company is not involved in any labor dispute nor is
any such dispute threatened. The Company is not aware that (A) any executive,
key employee or significant group of employees of the Company or any subsidiary
plans to terminate employment with the Company or any such subsidiary or (B) any
such executive or key employee is subject to any noncompete, nondisclosure,
confidentiality, employment, consulting or similar agreement that would be
violated by the present or proposed business activities of the Company and its
subsidiaries. Neither the Company nor any subsidiary has or expects to have any
liability for any prohibited transaction or funding deficiency or any complete
or partial withdrawal liability with respect to any pension, profit sharing or
other plan which is subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), to which the Company or any subsidiary makes or ever
has made a contribution and in which any employee of the Company or any
subsidiary is or has ever been a participant. With respect to such plans, the
Company and each subsidiary is in compliance in all material respects with all
applicable provisions of ERISA.
(x) The Company has obtained the written agreement described
in Section 8(j) of this Agreement from each of its officers, directors and [all]
holders of Common Stock.
(y) The Company and its subsidiaries have, and the Company and
its subsidiaries as of the Closing Date will have, good and marketable title in
fee simple to all real property and good and marketable title to all personal
property owned or proposed to be owned by them which is material to the business
of the Company and its subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described the Prospectus or such as
would not materially affect the value of such property and would not interfere
with the use made and proposed to be made of such property by the Company and
its subsidiaries and would not have a material adverse effect on the Company and
its subsidiaries considered as a whole; and any real property and buildings held
under lease by the Company and its subsidiaries or proposed to be held after
giving effect to the transactions described in the Prospectus are, or will be as
of the Closing Date, held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company and its
subsidiaries, and as would not have a material adverse effect on the Company and
its subsidiaries considered as a whole, in each case except as described in or
contemplated by the Prospectus.
(z) The Company and its subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are engaged
or propose to engage after giving effect to the transactions described in the
Prospectus; and neither the Company nor any subsidiary of the Company has any
reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue their business at a cost that
would not materially and adversely affect the
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condition, financial or otherwise, or the earnings, business or operations of
the Company and its subsidiaries considered as a whole, except as described in
or contemplated by the Prospectus.
(aa) Other than as contemplated by this Agreement, there is no
broker, finder or other party that is entitled to receive from the Company any
brokerage or finder's fee or other fee or commission as a result of any of the
transactions contemplated by this Agreement.
(bb) The Company and each of its subsidiaries maintain a
system of internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with management's
general or specific authorization; (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets; (iii)
access to assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(cc) To the Company's knowledge, neither the Company nor any
of its subsidiaries nor any employee or agent of the Company or any of its
subsidiaries has made any payment of funds of the Company or any of its
subsidiaries or received or retained any funds in violation of any law, rule or
regulation, which payment, receipt or retention of funds is of a character
required to be disclosed in the Prospectus.
(dd) Neither the Company nor any of its subsidiaries is or,
after application of the net proceeds of this offering as described under the
caption "Use of Proceeds" in the Prospectus, will become an "investment company"
or an entity "controlled" by an "investment company" as such terms are defined
in the Investment Company Act of 1940, as amended.
(ee) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters shall be deemed to
be a representation and warranty by the Company as to the matters covered
thereby.
3. PURCHASE BY, AND SALE AND DELIVERY TO, THE UNDERWRITERS.
The Company agrees to sell to the Underwriters, and each Underwriter, on the
basis of the representations, warranties, covenants and agreements herein
contained, but subject to the terms and conditions herein set forth, agrees,
severally and not jointly, to purchase from the Company, the respective numbers
of Firm Stock set forth in Schedule A hereto opposite its names, subject to
adjustment in accordance with Section 12 hereof, at U.S.$ _______ per share (the
"Purchase Price").
The Company will deliver the Firm Stock to the Representatives
for the respective accounts of the several Underwriters in the form of
definitive certificates, issued in such names and in such denominations as the
Representatives may direct by notice in writing to the Company given at or prior
to 12:00 Noon, New York Time, on the second full business day preceding the
First Closing Date (as defined below) or, if no such direction is received, in
the names of the respective
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Underwriters or in such other names as the Representatives may designate (solely
for the purpose of administrative convenience) and in such denominations as the
Representatives may determine, against payment of the aggregate Purchase Price
therefor in immediately available funds (same day funds), all at the offices of
Shearman & Sterling, 599 Lexington Avenue, New York, New York 10022. The time
and date of the delivery and closing shall be at 10:00 A.M., New York Time, on
_________, 1999, in accordance with Rule 15c6-1 of the Exchange Act. The time
and date of such payment and delivery are herein referred to as the "First
Closing Date". The First Closing Date and the location of delivery of, and the
form of payment for, the Firm Stock may be varied by agreement among the Company
and the Representatives. The First Closing Date may be postponed pursuant to the
provisions of Section 12.
The Company shall make the certificates for the Firm Stock
available to the Representatives for examination on behalf of the Underwriters
not later than 10:00 A.M., New York Time, on the business day preceding the
First Closing Date at the offices of SG Cowen, Financial Square, New York, New
York 10005.
It is understood that SG Cowen, individually and not as a
Representative of the several Underwriters, may (but shall not be obligated to)
make payment to the Company on behalf of any Underwriter or Underwriters, for
the Common Stock to be purchased by such Underwriter or Underwriters. Any such
payment by SG Cowen shall not relieve such Underwriter or Underwriters from any
of its or their other obligations hereunder.
The several Underwriters agree to make an initial public
offering of the Firm Stock at the initial public offering price as soon after
the effectiveness of the Registration Statement as in their judgment is
advisable. The Representatives shall promptly advise the Company of the making
of the initial public offering. The Company is advised by you that the Firm
Stock is to be offered to the public initially at U.S.$ ______ a share (the
"Public Offering Price") and to certain dealers selected by you at a price that
represents a concession not in excess of U.S.$ ____ a share under the Public
Offering Price, and that any Underwriter may allow, and such dealers may
reallow, a concession, not in excess of U.S.$ _____ a share, to any Underwriter
or to certain other dealers.
For the purpose of covering any over-allotments in connection
with the distribution and sale of the Firm Stock as contemplated by the
Prospectus, the Company hereby grants to the Underwriters an option to purchase,
severally and not jointly, up to 690,000 shares of Optional Stock. The price per
share to be paid for the Optional Stock shall be the Purchase Price. The option
granted hereby may be exercised as to all or any part of the Optional Stock at
any time, and from time to time, not more than thirty (30) days subsequent to
the effective date of this Agreement. No Optional Stock shall be sold and
delivered unless the Firm Stock previously has been, or simultaneously is, sold
and delivered. The right to purchase the Optional Stock or any portion thereof
may be surrendered and terminated at any time upon notice by the Underwriters to
the Company.
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The option granted hereby may be exercised by the Underwriters
by giving written notice from SG Cowen to the Company setting forth the number
of shares of the Optional Stock to be purchased by the Underwriters and the date
and time for delivery of and payment for the Optional Stock. Each date and time
for delivery of and payment for the Optional Stock (which may be the First
Closing Date, but not earlier) is herein called the "Option Closing Date" and
shall in no event be earlier than two (2) business days nor later than ten (10)
business days after written notice is given. (The Option Closing Date and the
First Closing Date are herein called the "Closing Dates".) Optional Stock shall
be purchased for the account of each Underwriter in the same proportion as the
number of shares of Firm Stock set forth opposite such Underwriter's name in
Schedule A hereto bears to the total number of shares of Firm Stock (subject to
adjustment by the Underwriters to eliminate odd lots). Upon exercise of the
option by the Underwriters, the Company agrees to sell to the Underwriters the
number of shares of Optional Stock set forth in the written notice of exercise
and the Underwriters agree, severally and not jointly and subject to the terms
and conditions herein set forth, to purchase the number of such shares
determined as aforesaid.
The Company will deliver the Optional Stock to the
Underwriters in the form of definitive certificates, issued in such names and in
such denominations as the Representatives may direct by notice in writing to the
Company given at or prior to 12:00 Noon, New York Time, on the second full
business day preceding the Option Closing Date or, if no such direction is
received, in the names of the respective Underwriters or in such other names as
SG Cowen may designate (solely for the purpose of administrative convenience)
and in such denominations as SG Cowen may determine, against payment of the
aggregate Purchase Price therefor in immediately available funds, at the offices
of Shearman & Sterling, 599 Lexington Avenue, New York, New York 10022. The
Company shall make the certificates for the Optional Stock available to the
Underwriters for examination not later than 10:00 A.M., New York Time, on the
business day preceding the Option Closing Date at the offices of SG Cowen,
Financial Square, New York, New York 10005. The Option Closing Date and the
location of delivery of, and the form of payment for, the Option Stock may be
varied by agreement between among the Company and SG Cowen. The Option Closing
Date may be postponed pursuant to the provisions of Section 12.
4. COVENANTS AND AGREEMENTS OF THE COMPANY. The Company
covenants and agrees with the several Underwriters that:
(a) The Company will (i) if the Company and the
Representatives have determined not to proceed pursuant to Rule 430A of the of
the Rules and Regulations, use its best efforts to cause the Registration
Statement to become effective, (ii) if the Company and the Representatives have
determined to proceed pursuant to Rule 430A of the Rules and Regulations, use
its best efforts to comply with the provisions of and make all requisite filings
with the Commission pursuant to Rule 430A and Rule 424 of the Rules and
Regulations and (iii) if the Company and the Representatives have determined to
deliver a Prospectus pursuant to Rule 434 of the Rules and Regulations, to use
its best efforts to comply with all the applicable provisions thereof. The
Company will advise the Representatives promptly as to the time at which the
Registration Statement becomes effective, will advise the Representatives
promptly of the issuance by the
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Commission of any stop order suspending the effectiveness of the Registration
Statement or of the institution of any proceedings for that purpose, and will
use its best efforts to prevent the issuance of any such stop order and to
obtain as soon as possible the lifting thereof, if issued. The Company will
advise the Representatives promptly of the receipt of any comments of the
Commission or any request by the Commission for any amendment of or supplement
to the Registration Statement or the Prospectus or for additional information
and will not at any time file any amendment to the Registration Statement or
supplement to the Prospectus which shall not previously have been submitted to
the Representatives a reasonable time prior to the proposed filing thereof or to
which the Representatives shall reasonably object in writing or which is not in
compliance with the Securities Act and the Rules and Regulations.
(b) The Company will prepare and file with the Commission,
promptly upon the request of the Representatives, any amendments or supplements
to the Registration Statement or the Prospectus which in the opinion of the
Representatives may be necessary to enable the several Underwriters to continue
the distribution of the Common Stock and will use its best efforts to cause the
same to become effective as promptly as possible.
(c) If at any time after the effective date of the
Registration Statement when a prospectus relating to the Common Stock is
required to be delivered under the Securities Act any event relating to or
affecting the Company or any of its subsidiaries occurs as a result of which the
Prospectus would include an untrue statement of a material fact, or omit to
state any material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, or if, in the
opinion of counsel for the Underwriters, it is necessary at any time to amend or
supplement the Prospectus to comply with applicable law, the Company will
promptly notify the Representatives thereof and will prepare, file with the
Commission and furnish, at its own expense, to the Underwriters and to the
dealers (whose names and addresses you will furnish to the Company) to which
Common Stock may have been sold by you on behalf of the Underwriters and to any
other dealers upon request, either amendments or supplements to the Prospectus
so that the statements in the Prospectus as so amended or supplemented will not,
in the light of the circumstances when the Prospectus is delivered to a
purchaser, be misleading or so that the Prospectus, as amended or supplemented,
will comply with applicable law.
(d) The Company will deliver to the Representatives, at or
before the Closing Dates, signed copies of the Registration Statement, as
originally filed with the Commission, and all amendments thereto including all
financial statements and exhibits thereto, and will deliver to the
Representatives such number of copies of the Registration Statement, including
such financial statements but without exhibits, and all amendments thereto, as
the Representatives may reasonably request. The Company will deliver or mail to
or upon the order of the Representatives, from time to time until the effective
date of the Registration Statement, as many copies of the Pre-effective
Prospectus as the Representatives may reasonably request. The Company will
deliver or mail to or upon the order of the Representatives on the date of the
initial public offering, and thereafter from time to time during the period when
delivery of a prospectus relating to the Common Stock is required under the
Securities Act, as many copies of the Prospectus, in final form or as thereafter
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amended or supplemented as the Representatives may reasonably request; provided,
however, that the expense of the preparation and delivery of any prospectus
required for use nine (9) months or more after the effective date of the
Registration Statement shall be borne by the Underwriters required to deliver
such prospectus.
(e) The Company will make generally available to its
shareholders as soon as practicable, but not later than fifteen (15) months
after the effective date of the Registration Statement, an earning statement
which will be in reasonable detail (but which need not be audited) and which
will comply with Section 11(a) of the Securities Act, covering a period of at
least twelve (12) months beginning after the "effective date" (as defined in
Rule 158 under the Securities Act) of the Registration Statement.
(f) The Company will cooperate with the Representatives to
enable the Common Stock to be registered or qualified for offering and sale by
the Underwriters and by dealers under the securities laws of such jurisdictions
as the Representatives may designate and at the request of the Representatives
will make such applications and furnish such consents to service of process or
other documents as may be required of it as the issuer of the Common Stock for
that purpose; provided, however, that the Company shall not be required to
qualify to do business or to file a general consent (other than that arising out
of the offering or sale of the Common Stock) to service of process in any such
jurisdiction where it is not now so subject. The Company will, from time to
time, prepare and file such statements and reports as are or may be required of
it as the issuer of the Common Stock to continue such qualifications in effect
for so long a period as the Representatives may reasonably request for the
distribution of the Common Stock. The Company will advise the Representatives
promptly after the Company becomes aware of the suspension of the qualifications
or registration of (or any such exception relating to) the Common Stock of the
Company for offering, sale or trading in any jurisdiction or of any initiation
or threat of any proceeding for any such purpose, and in the event of the
issuance of any orders suspending such qualifications, registration or
exception, the Company will, with the cooperation of the Representatives use its
best efforts to obtain the withdrawal thereof.
(g) The Company will furnish to its shareholders as soon as
practicable after the end of each fiscal year an annual report containing
financial statements certified by independent public accountants, will furnish
to its shareholders as soon as practicable after the end of each of the first
three quarters of each fiscal year (beginning with the fiscal quarter ending
after the effective date of the Registration Statement) consolidated summary
financial information of the Company and its subsidiaries for such quarter in
reasonable detail.
(h) During the period of three (3) years from the date hereof,
the Company will deliver to the Representatives and, upon request, to each of
the other Underwriters, as soon as they are available, copies of each annual
report of the Company, including the opinion thereon of the Company's
independent public accountants, and each other report furnished by the Company
to its shareholders and will deliver to the Representatives, (i) as soon as they
are available, copies of any other reports (financial or other) or
communications which the Company shall publish or otherwise
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make available to any of its shareholders as such, (ii) as soon as practicable
after the filing thereof, copies of each proxy statement, Annual Report on Form
10-K, Quarterly Report on Form 10-Q, Report on Form 8-K or other report and
financial statements filed by the Company with the Commission, or the NASD or
any securities exchange and (iii) from time to time such other information
concerning the Company as you may request. So long as the Company has active
subsidiaries, such financial statements will be on a consolidated basis to the
extent the accounts of the Company and its subsidiaries are consolidated in
reports furnished to its shareholders generally. Separate financial statements
shall be furnished for all subsidiaries whose accounts are not consolidated but
which at the time are significant subsidiaries as defined in the Rules and
Regulations.
(i) The Company will use its best efforts to list the Common
Stock, subject to official notice of issuance, on the Nasdaq National Market
concurrently with the effectiveness of the Registration Statement.
(j) The Company will maintain a transfer agent and registrar
for its Common Stock.
(k) Prior to filing its quarterly statements on Form 10-Q, the
Company will have its independent auditors perform a limited quarterly review of
its quarterly numbers.
(l) The Company will not, for a period of 180 days following
the date of the final prospectus filed by the Company with the Securities and
Exchange Commission in connection with such public offering without the prior
written consent of SG Cowen, on behalf of the several Underwriters, (1) 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 by the undersigned in accordance with the rules and
regulations promulgated under the Securities Act) or (2) 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 in clause (1) or (2) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise, other than the Company's
sale of Common Stock hereunder and the Company's issuance of Common Stock upon
the exercise of warrants and stock options which are presently outstanding and
described in the Prospectus.
(m) The Company will apply the net proceeds from the sale of
the Common Stock as set forth in the description under "Use of Proceeds" in the
Prospectus, which description complies in all respects with the requirements of
Item 504 of Regulation S-K.
(n) The Company will supply you with copies of all
correspondence to and from, and all documents issued to and by, the Commission
in connection with the registration of the Common Stock under the Securities
Act.
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(o) Prior to each of the Closing Dates the Company will
furnish to you, as soon as they have been prepared, copies of any unaudited
interim consolidated financial statements of the Company and its subsidiaries
for any periods subsequent to the periods covered by the financial statements
appearing in the Registration Statement and the Prospectus.
(p) Prior to each of the Closing Dates the Company will issue
no press release or other communications directly or indirectly and hold no
press conference with respect to the Company or any of its subsidiaries, the
financial condition, results of operations, business, prospects, assets or
liabilities of any of them, or the offering of the Common Stock, without your
prior written consent. For a period of twelve (12) months following the first
Closing Date, the Company will use its best efforts to provide to you copies of
each press release or other public communications with respect to the financial
condition, results of operations, business, prospects, assets or liabilities of
the Company at least twenty-four (24) hours prior to the public issuance thereof
or such longer advance period as may reasonably be practicable.
5. PAYMENT OF EXPENSES. (a) The Company will pay (directly or
by reimbursement) all costs, fees and expenses incurred in connection with
expenses incident to the performance of the obligations of the Company under
this Agreement and in connection with the transactions contemplated hereby,
including but not limited to (i) all expenses and taxes incident to the issuance
and delivery of the Common Stock to the Representatives; (ii) all expenses
incident to the registration of the Common Stock under the Securities Act; (iii)
the costs of preparing stock certificates (including printing and engraving
costs); (iv) all fees and expenses of the registrar and transfer agent of the
Common Stock; (v) all necessary issue, transfer and other stamp taxes in
connection with the issuance and sale of the Common Stock to the Underwriters;
(vi) fees and expenses of the Company's counsel and the Company's independent
accountants; (vii) all costs and expenses incurred in connection with the
preparation, printing filing, shipping and distribution of the Registration
Statement, each Pre-effective Prospectus and the Prospectus (including all
exhibits and financial statements) and all amendments and supplements provided
for herein, the "Agreement Among Underwriters" between the Representatives and
the Underwriters, the Master Selected Dealers' Agreement, the Underwriters'
Questionnaire and the Blue Sky memoranda (including related fees and expenses of
counsel to the Underwriters) and this Agreement; (viii) all filing fees,
attorneys' fees and expenses incurred by the Company or the Underwriters in
connection with exemptions from the qualifying or registering (or obtaining
qualification or registration of) all or any part of the Common Stock for offer
and sale under the Blue Sky or other securities laws of such jurisdictions as
the Representatives may designate; (ix) all fees and expenses paid or incurred
in connection with filings made with the NASD; (x) all fees and expenses paid or
incurred in connection with listing the Common Stock on Nasdaq; (xi) the
Company's expenses incurred in connection with the roadshow; and (xii) all other
costs and expenses incident to the performance of their obligations hereunder
which are not otherwise specifically provided for in this Section.
(b) In addition to their other obligations under Section 6(a)
hereof, the Company agrees that, as an interim measure during the pendency of
any claim, action, investigation, inquiry
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or other proceeding arising out of or based upon (i) any statement or omission
or any alleged statement or omission, (ii) any act or failure to act or any
alleged act or failure to act or (iii) any breach or inaccuracy in their
representations and warranties, it will reimburse each Underwriter (and to the
extent applicable, each officer, director, or controlling person) on a quarterly
basis for all reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Company's obligation to reimburse each
Underwriter for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, each Underwriter shall promptly return it to the Company, together
with interest, compounded daily, determined on the basis of the prime rate (or
other commercial lending rate for borrowers of the highest credit standing)
announced from time to time by _______, New York, New York (the "Prime Rate").
Any such interim reimbursement payments which are not made to an Underwriter in
a timely manner as provided below shall bear interest at the Prime Rate from the
due date for such reimbursement. This expense reimbursement agreement will be in
addition to any other liability which the Company may otherwise have. The
request for reimbursement will be sent to the Company.
(c) In addition to its other obligations under Section 6(b)
hereof, each Underwriter severally agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any statement or omission, or any alleged statement
or omission, described in Section 6(d) hereof which relates to information
furnished to the Company pursuant to Section __ hereof, it will reimburse the
Company (and, to the extent applicable, each officer, director, or controlling
person) on a quarterly basis for all reasonable legal or other expenses incurred
in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company (and, to the extent
applicable, each officer, director, or controlling person) for such expenses and
the possibility that such payments might later be held to have been improper by
a court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company (and, to the
extent applicable, each officer, director, or controlling person) shall promptly
return it to the Underwriters together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to the Company within thirty (30) days of a request
for reimbursement shall bear interest at the Prime Rate from the date of such
request. This indemnity agreement will be in addition to any liability which
such Underwriter may otherwise have.
(d) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in paragraph (b)
and/or (c) of this Section 5, including the amounts of any requested
reimbursement payments and the method of determining such amounts, shall be
settled by arbitration conducted under the provisions of the Constitution and
Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant
to the Code of Arbitration Procedure of the NASD. Any such arbitration must be
commenced by service of a written demand
16
<PAGE>
for arbitration or written notice of intention to arbitrate, therein electing
the arbitration tribunal. In the event the party demanding arbitration does not
make such designation of an arbitration tribunal in such demand or notice, then
the party responding to said demand or notice is authorized to do so. Such an
arbitration would be limited to the operation of the interim reimbursement
provisions contained in paragraph (b) of this Section 5 and would not resolve
the ultimate propriety or enforceability of the obligation to reimburse expenses
which is created by the provisions of Section 6.
6. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to
indemnify and hold harmless each Underwriter and each person, if any, who
controls such Underwriter within the meaning of the Securities Act and the
respective officers, directors, partners, employees, representatives and agents
of each of such Underwriter (collectively, the "Underwriter Indemnified Parties"
and, each, an "Underwriter Indemnified Party"), against any losses, claims,
damages, liabilities or expenses (including the reasonable cost of investigating
and defending against any claims therefor and counsel fees incurred in
connection therewith), joint or several, which may be based upon the Securities
Act, or any other statute or at common law, (i) on the ground or alleged ground
that any Pre-effective Prospectus, the Registration Statement or the Prospectus
(or any Pre-effective Prospectus, the Registration Statement or the Prospectus
as from time to time amended or supplemented) includes or allegedly includes an
untrue statement of a material fact or omits to state a material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading, unless
such statement or omission was made in reliance upon, and in conformity with,
written information furnished to the Company by any Underwriter, directly or
through the Representatives, specifically for use in the preparation thereof or
(ii) for any act or failure to act or any alleged act or failure to act by any
Underwriter in connection with, or relating in any manner to, the Common Stock
or the offering contemplated hereby, and which is included as part of or
referred to in any loss, claim, damage, liability or expense arising out of or
based upon matters covered by clause (i) above (provided that the Company shall
not be liable under this clause (ii) to the extent that it is determined in a
final judgment by a court of competent jurisdiction that such loss, claim,
damage, or liability or expense resulted directly from any such acts or failures
to act undertaken or omitted to be taken by such Underwriter through its gross
negligence or willful misconduct). The Company will be entitled to participate
at its own expense in the defense or, if it so elects, to assume the defense of
any suit brought to enforce any such liability, but if the Company elects to
assume the defense, such defense shall be conducted by counsel chosen by it and
reasonably acceptable to the Underwriters. In the event the Company elects to
assume the defense of any such suit and retain such counsel, any Underwriter
Indemnified Parties, defendant or defendants in the suit, may retain additional
counsel but shall bear the fees and expenses of such counsel unless (i) the
Company shall have specifically authorized the retaining of such counsel or (ii)
the parties to such suit include any such Underwriter Indemnified Parties, and
the Company and such Underwriter Indemnified Parties at law or in equity have
been advised by counsel to the Underwriters that one or more legal defenses may
be available to it or them which may not be available to the Company, in which
case the Company shall not be entitled to assume the defense of such suit
notwithstanding its obligation to bear the fees and expenses of such counsel,
provided that the Company shall not, in connection with any proceeding
17
<PAGE>
or related proceeding in the same jurisdiction, be liable for the fees and
expenses of more than one separate firm representing the Underwriter; provided,
further, that in no case is the Company to be liable with respect to any claims
made against the Underwriter unless the Underwriter shall have notified the
Company in writing within a reasonable time after the summons or other first
legal process giving information of the nature of the claim shall have been
served upon the Underwriter, but failure to notify the Company of such claim
shall not relieve it from any liability which it may have to the Underwriter
otherwise than on account of its indemnity agreement contained in this
paragraph. This indemnity agreement is not exclusive and will be in addition to
any liability which the Company might otherwise have and shall not limit any
rights or remedies which may otherwise be available at law or in equity to each
Underwriter Indemnified Party.
(b) Each Underwriter severally and not jointly agrees to
indemnify and hold harmless the Company, each of its directors, each of its
officers who have signed the Registration Statement and each person, if any, who
controls the Company within the meaning of the Securities Act (collectively, the
"Company Indemnified Parties"), against any losses, claims, damages, liabilities
or expenses (including, unless the Underwriter or Underwriters elect to assume
the defense, the reasonable cost of investigating and defending against any
claims therefor and counsel fees incurred in connection therewith), joint or
several, which arise out of or are based in whole or in part upon the Securities
Act, the Exchange Act or any other federal, state, local or foreign statute or
regulation, or at common law, on the ground or alleged ground that any
Pre-effective Prospectus, the Registration Statement or the Prospectus (or any
Pre-effective Prospectus, the Registration Statement or the Prospectus, as from
time to time amended and supplemented) includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
in which they were made, not misleading, but only insofar as any such statement
or omission was made in reliance upon, and in conformity with, written
information furnished to the Company by such Underwriter, directly or through
the Representatives, specifically for use in the preparation thereof; provided,
however, that in no case is such Underwriter to be liable with respect to any
claims made against any Company Indemnified Party against whom the action is
brought unless such Company Indemnified Party shall have notified such
Underwriter in writing within a reasonable time after the summons or other first
legal process giving information of the nature of the claim shall have been
served upon the Company Indemnified Party, but failure to notify such
Underwriter of such claim shall not relieve it from any liability which it may
have to any Company Indemnified Party otherwise than on account of its indemnity
agreement contained in this paragraph. Such Underwriter shall be entitled to
participate at its own expense in the defense, or, if it so elects, to assume
the defense of any suit brought to enforce any such liability, but, if such
Underwriter elects to assume the defense, such defense shall be conducted by
counsel chosen by it. In the event that any Underwriter elects to assume the
defense of any such suit and retain such counsel, the Company Indemnified
Parties and any other Underwriter or Underwriters or controlling person or
persons, defendant or defendants in the suit, shall bear the fees and expenses
of any additional counsel retained by them, respectively. The Underwriter
against whom indemnity may be sought shall not be liable to indemnify any person
for any settlement of any such claim effected without such Underwriter's
consent. This indemnity agreement is not exclusive and will be in addition to
any liability which such Underwriter might
18
<PAGE>
otherwise have and shall not limit any rights or remedies which may otherwise be
available at law or in equity to any Company Indemnified Party;
(c) If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages,
liabilities or expenses (or actions in respect thereof) referred to herein, then
each indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Common Stock. If, however,
the allocation provided by the immediately preceding sentence is not permitted
by applicable law, then each indemnifying party shall contribute to such amount
paid or payable by such indemnified party in such proportion as is appropriate
to reflect not only such relative benefits but also the relative fault of the
Company on the one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses (or actions in respect thereof), as well as any other
relevant equitable considerations. The relative benefits received by the Company
on the one hand and the Underwriters on the other shall be deemed to be in the
same proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Underwriters and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the Underwriters
agree that it would not be just and equitable if contribution were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to above. The amount paid or payable by
an indemnified party as a result of the losses, claims, damages, liabilities or
expenses (or actions in respect thereof) referred to above shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating, defending, settling or compromising any
such claim. Notwithstanding the provisions of this subsection (d), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the shares of the Common Stock underwritten by
it and distributed to the public were offered to the public exceeds the amount
of any damages which such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. The Underwriters' obligations to contribute are several in proportion
to their respective underwriting obligations and not joint. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
7. SURVIVAL OF INDEMNITIES, REPRESENTATIONS, WARRANTIES, ETC.
The respective indemnities, covenants, agreements, representations, warranties
and other statements of the
19
<PAGE>
Company, and the several Underwriters, as set forth in this Agreement or made by
them respectively, pursuant to this Agreement, shall remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter,
the Company or any of its officers or directors or any controlling person, and
shall survive delivery of and payment for the Common Stock.
8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The respective
obligations of the several Underwriters hereunder shall be subject to the
accuracy, at and (except as otherwise stated herein) as of the date hereof and
at and as of each of the Closing Dates, of the representations and warranties
made herein by the Company, to compliance at and as of each of the Closing Dates
by the Company with its covenants and agreements herein contained and other
provisions hereof to be satisfied at or prior to each of the Closing Dates, and
to the following additional conditions:
(a) The Registration Statement shall have become effective and
no stop order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge of
the Company or the Representatives, shall be threatened by the Commission, and
any request for additional information on the part of the Commission (to be
included in the Registration Statement or the Prospectus or otherwise) shall
have been complied with to the reasonable satisfaction of the Representative.
Any filings of the Prospectus, or any supplement thereto, required pursuant to
Rule 424(b) or Rule 434 of the Rules and Regulations, shall have been made in
the manner and within the time period required by Rule 424(b) and Rule 434 of
the Rules and Regulations, as the case may be.
(b) The Representatives shall have been satisfied that there
shall not have occurred any change,on a consolidated basis, prior to each of the
Closing Dates in the condition (financial or otherwise), properties, business,
management, prospects, net worth or results of operations of the Company and its
subsidiaries considered as a whole, or any change in the capital stock,
short-term or long-term debt of the Company and its subsidiaries considered as a
whole, such that (i) the Registration Statement or the Prospectus, or any
amendment or supplement thereto, contains an untrue statement of fact which, in
the opinion of the Representatives, is material, or omits to state a fact which,
in the opinion of the Representatives, is required to be stated therein or is
necessary to make the statements therein not misleading, or (ii) it is
unpracticable in the reasonable judgment of the Representatives to proceed with
the public offering or purchase the Common Stock as contemplated hereby.
(c) The Representatives shall be satisfied that no legal or
governmental action, suit or proceeding affecting the Company which is material
and adverse to the Company or which affects or may affect the Company's ability
to perform their respective obligations under this Agreement shall have been
instituted or threatened and there shall have occurred no material adverse
development in any existing such action, suit or proceeding.
(d) At the time of execution of this Agreement, the
Representatives shall have received from PricewaterhouseCoopers LLP, independent
certified public accountants, a letter, dated the date hereof, in form and
substance satisfactory to the Underwriters.
20
<PAGE>
(e) The Representatives shall have received from
PricewaterhouseCoopers LLP, independent certified public accountants, letters,
dated each of the Closing Dates, to the effect that such accountants reaffirm,
as of each of the Closing Dates, and as though made on each of the Closing
Dates, the statements made in the letter furnished by such accountants pursuant
to paragraph (d) of this Section 8.
(f) The Representatives shall have received from Rich, May,
Bilodeau & Flaherty, P.C., counsel for the Company, opinions, dated each of the
Closing Dates, to the effect set forth in Exhibit I hereto.
(g) The Representatives shall have received from Shearman &
Sterling, counsel for the Underwriters, their opinions dated each of the Closing
Dates with respect to the incorporation of the Company, the validity of the
Common Stock, the Registration Statement and the Prospectus and such other
related matters as it may reasonably request, and the Company shall have
furnished to such counsel such documents as they may request for the purpose of
enabling them to pass upon such matters.
(h) The Representatives shall have received certificates,
dated each of the Closing Dates, of the Chief Executive Officer or the President
of the Company to the effect that:
(i) The representations and warranties of the Company
in this Agreement are true and correct at and as of each of the Closing Dates,
and the Company has complied with all the agreements and performed or satisfied
all the conditions on its part to be performed or satisfied at or prior to the
Closing Dates; and
(ii) Since the respective dates as of which
information is given in the Registration Statement and the Prospectus, and
except as disclosed in or contemplated by the Prospectus, (i) there has not been
any material adverse change or a development involving a material adverse change
in the condition (financial or otherwise), properties, business, management,
prospects, net worth or results of operations of the Company and its
subsidiaries considered as a whole; (ii) the business and operations conducted
by the Company and its subsidiaries have not sustained a loss by strike, fire,
flood, accident or other calamity (whether or not insured) of such a character
as to interfere materially with the conduct of the business and operations of
the Company and its subsidiaries considered as a whole; (iii) no legal or
governmental action, suit or proceeding is pending or threatened against the
Company which is material to the Company, whether or not arising from
transactions in the ordinary course of business, or which may materially and
adversely affect the transactions contemplated by this Agreement; (iv) since
such dates and except as so disclosed, the Company has not incurred any material
liability or obligation, direct, contingent or indirect, made any change in its
capital stock (except pursuant to its stock plans), made any material change in
its short-term or funded debt or repurchased or otherwise acquired any of the
Company's capital stock; and (v) the Company has not declared or paid any
dividend, or made any other
21
<PAGE>
distribution, upon its outstanding capital stock payable to stockholders of
record on a date prior to the Closing Date.
(i) The Company shall have furnished to the Representatives
such additional certificates as the Representatives may have reasonably
requested as to the accuracy, at and as of each of the Closing Dates, of the
representations and warranties made herein by it and as to compliance at and as
of each of the Closing Dates by it with its covenants and agreements herein
contained and other provisions hereof to be satisfied at or prior to each of the
Closing Dates, and as to satisfaction of the other conditions to the obligations
of the Underwriters hereunder.
(j) SG Cowen shall have received the written agreements,
substantially in the form of Exhibit II hereto, of the officers, directors and
[all] holders of Common Stock that each will not offer, sell, assign, transfer,
encumber, contract to sell, grant an option to purchase or otherwise dispose of
any shares of Common Stock (including, without limitation, Common Stock which
may be deemed to be beneficially owned by such officer, director or holder in
accordance with the Rules and Regulations) during the 180 days following the
date of the final Prospectus.
(k) The Nasdaq National Market shall have approved the Common
Stock for listing, subject only to official notice of issuance.
(l) All opinions, certificates, letters and other documents
will be in compliance with the provisions hereunder only if they are
satisfactory in form and substance to the Representatives. The Company will
furnish to the Representatives conformed copies of such opinions, certificates,
letters and other documents as the Representatives shall reasonably request. If
any of the conditions hereinabove provided for in this Section shall not have
been satisfied when and as required by this Agreement, this Agreement may be
terminated by the Representatives by notifying the Company of such termination
in writing or by telegram at or prior to each of the Closing Dates, but SG Cowen
shall be entitled to waive any of such conditions.
9. EFFECTIVE DATE. This Agreement shall become effective
immediately as to Sections 5, 6, 8, 9 and 10, and, as to all other provisions,
at 11:00 a.m. New York City time on the first full business day following the
effectiveness of the Registration Statement or at such earlier time after the
Registration Statement becomes effective as the Representatives may determine on
and by notice to the Company or by release of any of the Common Stock for sale
to the public. For the purposes of this Section 9, the Common Stock shall be
deemed to have been so released upon the release for publication of any
newspaper advertisement relating to the Common Stock or upon the release by you
of telegrams (i) advising Underwriters that the shares of Common Stock are
released for public offering or (ii) offering the Common Stock for sale to
securities dealers, whichever may occur first.
10. TERMINATION. This Agreement (except for the provisions of
Section 5) may be terminated by the Company at any time before it becomes
effective in accordance with Section 9 by notice to the Representatives and may
be terminated by the Representatives at any time before
22
<PAGE>
it becomes effective in accordance with Section 9 by notice to the Company. In
the event of any termination of this Agreement under this or any other provision
of this Agreement, there shall be no liability of any party to this Agreement to
any other party, other than as provided in Sections 5, 6 and 11 and other than
as provided in Section 12 as to the liability of defaulting Underwriters.
This Agreement may be terminated after it becomes effective by
the Representatives by notice to the Company (i) if at or prior to the First
Closing Date trading in securities on any of the New York Stock Exchange or the
Nasdaq National Market System shall have been suspended or minimum or maximum
prices shall have been established on any such exchange or market, or a banking
moratorium shall have been declared by New York or United States authorities;
(ii) trading of any securities of the Company shall have been suspended on any
exchange or in any over-the-counter market; (iii) if at or prior to the First
Closing Date there shall have been (A) an outbreak or escalation of hostilities
between the United States and any foreign power or of any other insurrection or
armed conflict involving the United States or (B) any change in financial
markets or any calamity or crisis which, in the judgment of the Representative,
makes it impractical or inadvisable to offer or sell the Common Stock on the
terms contemplated by the Prospectus; (iv) if there shall have been any
development or prospective development involving particularly the business or
properties or securities of the Company or any of its subsidiaries or the
transactions contemplated by this Agreement, which, in the judgment of the
Representative, makes it impracticable or inadvisable to offer or deliver the
Common Stock on the terms contemplated by the Prospectus; (v) if there shall be
any litigation or proceeding, pending or threatened, which, in the judgment of
the Representative, makes it impracticable or inadvisable to offer or deliver
the Common Stock on the terms contemplated by the Prospectus; or (vi) if there
shall have occurred any of the events specified in the immediately preceding
clauses (i) - (v) together with any other such event that makes it, in the
judgment of the Representative, impractical or inadvisable to offer or deliver
the Common Stock on the terms contemplated by the Prospectus.
11. REIMBURSEMENT OF UNDERWRITERS. Notwithstanding any other
provisions hereof, if this Agreement shall not become effective by reason of any
election of the Company pursuant to the first paragraph of Section 10 or shall
be terminated by the Representatives under Section 8 or Section 10, the Company
will bear and pay the expenses specified in Section 5 hereof and, in addition to
the obligations pursuant to Section 6 hereof, the Company will reimburse the
reasonable out-of-pocket expenses of the several Underwriters (including
reasonable fees and disbursements of counsel for the Underwriters) incurred in
connection with this Agreement and the proposed purchase of the Common Stock,
and promptly upon demand the Company will pay such amounts to you as
Representative.
12. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or
Underwriters shall default in its or their obligations to purchase shares of
Stock hereunder and the aggregate number of shares which such defaulting
Underwriter or Underwriters agreed but failed to purchase does not exceed ten
percent (10%) of the total number of shares underwritten, the other Underwriters
shall be obligated severally, in proportion to their respective commitments
hereunder, to purchase the shares which such defaulting Underwriter or
Underwriters agreed but failed to purchase. If any
23
<PAGE>
Underwriter or Underwriters shall so default and the aggregate number of shares
with respect to which such default or defaults occur is more than ten percent
(10%) of the total number of shares underwritten and arrangements satisfactory
to the Representatives and the Company for the purchase of such shares by other
persons are not made within forty-eight (48) hours after such default, this
Agreement shall terminate.
If the remaining Underwriters or substituted Underwriters are
required hereby or agree to take up all or part of the shares of Stock of a
defaulting Underwriter or Underwriters as provided in this Section 12, (i) the
Company shall have the right to postpone the Closing Dates for a period of not
more than five (5) full business days in order that the Company may effect
whatever changes may thereby be made necessary in the Registration Statement or
the Prospectus, or in any other documents or arrangements, and the Company
agrees promptly to file any amendments to the Registration Statement or
supplements to the Prospectus which may thereby be made necessary, and (ii) the
respective numbers of shares to be purchased by the remaining Underwriters or
substituted Underwriters shall be taken as the basis of their underwriting
obligation for all purposes of this Agreement. Nothing herein contained shall
relieve any defaulting Underwriter of its liability to the Company or the other
Underwriters for damages occasioned by its default hereunder. Any termination of
this Agreement pursuant to this Section 12 shall be without liability on the
part of any non-defaulting Underwriter or the Company, except for expenses to be
paid or reimbursed pursuant to Section 5 and except for the provisions of
Section 6.
13. NOTICES. All communications hereunder shall be in writing
and, if sent to the Underwriters shall be mailed, delivered or faxed and
confirmed to you, as their Representatives c/o SG Cowen at Financial Square, New
York, New York 10005 except that notices given to an Underwriter pursuant to
Section 6 hereof shall be sent to such Underwriter at the address furnished by
the Representatives or, if sent to the Company, shall be mailed, delivered or
faxed and confirmed c/o William S. Reece, 25 Corporate Drive, Suite 310,
Burlington, Massachusetts 01803, with a copy to Rich, May, Bilodeau & Flaherty,
P.C., 294 Washington Street, Boston, MA 02108, Attention Stephen M. Kane, Esq.
14. SUCCESSORS. This Agreement shall inure to the benefit of
and be binding upon the several Underwriters, the Company and its respective
successors and legal representatives. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person other than the
persons mentioned in the preceding sentence any legal or equitable right, remedy
or claim under or in respect of this Agreement, or any provisions herein
contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person; except that the representations, warranties,
covenants, agreements and indemnities of the Company contained in this Agreement
shall also be for the benefit of the person or persons, if any, who control any
Underwriter or Underwriters within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act, and the indemnities of the several
Underwriters shall also be for the benefit of each director of the Company, each
of its officers who has signed the Registration Statement and the
24
<PAGE>
person or persons, if any, who control the Company within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act.
15. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
16. AUTHORITY OF THE REPRESENTATIVE. In connection with
this Agreement, you will act for and on behalf of the several Underwriters,
and any action taken under this Agreement by SG Cowen, Banc of America
Securities LLC and Volpe Brown Whelan & Company, LLC, as Representatives,
will be binding on all the Underwriters.
17. PARTIAL UNENFORCEABILITY. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
18. GENERAL. This Agreement constitutes the entire agreement
of the parties to this Agreement and supersedes all prior written or oral and
all contemporaneous oral agreements, understandings and negotiations with
respect to the subject matter hereof.
In this Agreement, the masculine, feminine and neuter genders
and the singular and the plural include one another. The section headings in
this Agreement are for the convenience of the parties only and will not affect
the construction or interpretation of this Agreement. This Agreement may be
amended or modified, and the observance of any term of this Agreement may be
waived, only by a writing signed by the Company and the Representative.
19. COUNTERPARTS. This Agreement may be signed in two (2) or
more counterparts, each of which shall be an original, with the same effect as
if the signatures thereto and hereto were upon the same instrument.
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<PAGE>
If the foregoing correctly sets forth our understanding,
please indicate your acceptance thereof in the space provided below for that
purpose, whereupon this letter and your acceptance shall constitute a binding
agreement between us.
Very truly yours,
HEALTHGATE DATA CORP.
By:
--------------------------------------
William S. Reece
Chairman and Chief Executive Officer
Accepted and delivered in
_________________as of
the date first above written.
SG COWEN SECURITIES CORPORATION
BANC OF AMERICA SECURITIES LLC
VOLPE BROWN WHELAN & COMPANY, LLC
Acting on its own behalf
and as Representatives of the several Underwriters
referred to in the foregoing Agreement.
By: SG Cowen Securities Corporation,
By:
-----------------------------------
John P. Dunphy
Managing Director - Syndicate
By: Banc of America Securities LLC
By:
-----------------------------------
By: Volpe Brown Whelan & Company, LLC
By:
-----------------------------------
26
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
UNDERWRITERS FIRM STOCK
- ------------ ----------
<S> <C>
SG Cowen Securities Corporation
Banc of America Securities LLC
Volpe Brown Whelan & Company, LLC
TOTAL
</TABLE>
27
<PAGE>
Exhibit 3.2
CERTIFICATE OF AMENDMENT OF
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
HEALTHGATE DATA CORP.
HealthGate Data Corp., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation has duly adopted
a resolution, pursuant to Sections 141 and 242 of the General Corporation Law of
the State of Delaware, setting forth an amendment to the Corporation's Amended
and Restated Certificate of Incorporation and declaring said amendment to be
advisable.
SECOND: That the stockholders of the Corporation have duly approved
said amendment by the required vote of such stockholders, adopted by the written
consent of a majority in interest of each class of stockholders in accordance
with Sections 228 and 242 of the General Corporation Law of the State of
Delaware. Prompt written notice of the adoption of the amendment herein
certified has been given to those stockholders who have not consented in writing
thereto, as provided in Section 228 of the General Corporation Law of the State
of Delaware.
THIRD: That the Amended and Restated Certificate of Incorporation of
the Corporation, as previously amended, is hereby further amended as follows:
(A) by deleting the first paragraph of Article Fourth
(said paragraph begins "The total number..." and ends
".... to $208,346.29"), and inserting therefor the
following two paragraphs:
"FOURTH. The total number of shares of capital stock of all
classes which the Corporation shall have authority to issue is 100,834,629
shares, consisting of 100,000,000 shares of Common Stock, $.01 par value per
share, and 834,629 shares of Preferred Stock, $.01 par value per share,
amounting in the aggregate to $1,008,346.29.
On the close of business on the day this amendment shall be
accepted for filing by the office of the Secretary of State of the State of
Delaware, each share of the Corporation's Common Stock, par value $0.01 per
share, issued and outstanding immediately prior thereto (the "Old Stock") shall,
IPSO FACTO, and without any action on the part of the holders of shares of Old
Stock, be changed, converted and reclassified into 4.564 shares of Common Stock
(the "New Stock"); provided, however, if any fractional interest in a share of
New Stock would, except for the provisions of this paragraph, be deliverable
upon any such change, conversion and reclassification of Old Stock, the
Corporation, in lieu of delivering the fractional share therefor, shall pay an
amount to the holder thereof equal to the Market Price of such fractional
interest as of the date of
<PAGE>
conversion. In accordance with the terms of the Amended and Restated Certificate
of Incorporation, as amended, upon the change, conversion and reclassification
of the Old Stock to the New Stock, as provided above, the Conversion Price
applicable to the Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred and Series E Preferred, and all other prices and share
numbers required to be adjusted in the event of a stock split, shall be adjusted
to reflect the stock split effected by this amendment."
(B) by adding definitions of Market Price and Public
Offering to the end of Part A to Article Fourth as
follows:
"MARKET PRICE," as used in this Part A, means the average of
the closing prices of sales of the Corporation's Common Stock on all securities
exchanges on which the Common Stock may at the time be listed, or, if there have
been no sales on any such exchange on any day, the average of the highest bid
and lowest asked prices on all such exchanges at the end of such day, or, if on
any day the Common Stock is not so listed, the average of the representative bid
and asked prices quoted in the NASDAQ System as of 4:00 P.M., New York time, or,
if on any day the Common Stock is not quoted in the NASDAQ System, the average
of the highest bid and lowest asked prices on such day in the domestic
over-the-counter market as reported by the National Quotation Bureau,
Incorporated, or any similar successor organization, in each such case averaged
over a period of 21 days consisting of the day as of which "Market Price" is
being determined and the 20 consecutive business days prior to such day. If at
any time the Common Stock is not listed on any securities exchange or quoted in
the NASDAQ System or the over-the-counter market, the "Market Price" will be the
fair value thereof determined in good faith by the Board of Directors of the
Corporation. Notwithstanding the foregoing, in the event Market Price" is being
determined as a result of a stock split or dividend effected in connection with
a firm commitment underwritten initial Public Offering, "Market Price" shall
mean the price negotiated and agreed to by the Corporation and the underwriters
of such Public Offering as the initial public offering price of the
Corporation's Common Stock, to the extent that such price has been determined
prior to or on the date on which this Amendment is accepted for filing by the
office of the Secretary of State of the State of Delaware."
"PUBLIC OFFERING," as used in this Part A, means any offering
by the Corporation of its Common Stock to the public pursuant to an effective
registration statement under the Securities Act of 1933, as then in effect, or
any comparable statement under any similar federal statute then in force;
provided that a "Public Offering" will not include an offering made in
connection with a business acquisition or an employee benefit plan."
(C) by adding a second paragraph to the definition of
"Market Price" as it appears in paragraph 10 of Parts
C, D, E, F and G to Article Fourth as follows:
"Notwithstanding the foregoing, in the event of a mandatory
conversion of shares of Preferred Stock into Common Stock in connection with a
firm commitment underwritten initial
2
<PAGE>
Public Offering, "Market Price" shall mean the price negotiated and agreed to by
the Corporation and the underwriters of such Public Offering as the initial
public offering price of the Corporation's Common Stock."
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3
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed hereto and this Certificate of Amendment to be signed by its President
and attested by its Assistant Secretary this __ day of ________, 1999.
HEALTHGATE DATA CORP.
[CORPORATE SEAL]
By:
---------------------------------
William S. Reece, President
ATTEST:
By:
--------------------------
Stephen M. Kane
Assistant Secretary
4
<PAGE>
Exhibit 3.3
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
HEALTHGATE DATA CORP.
HealthGate Data Corp., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY
CERTIFY:
1. The name of the corporation is HealthGate Data Corp. (the
"Corporation"). The Certificate of Incorporation of the Corporation, under the
name Medical Data Interface Design, Inc., was filed with the Secretary of State
of the State of Delaware (the "Secretary of State") on February 8, 1994.
2. The Certificate of Incorporation was amended by a Certificate of
Amendment filed with the Secretary of State on July 11, 1994. The Certificate of
Incorporation was amended and restated by an Amended and Restated Certificate of
Incorporation filed with the Secretary of State on March 14, 1995. The Amended
and Restated Certificate of Incorporation was again amended by a Certificate of
Amendment filed with the Secretary of State on May 23, 1995. The Amended and
Restated Certificate of Incorporation was again amended by a Certificate of
Amendment filed with the Secretary of State on October 18, 1995. The Amended and
Restated Certificate of Incorporation was again amended by a Certificate of
Amendment filed with the Secretary of State on August 21, 1996. The Amended and
Restated Certificate of Incorporation was again amended by a Certificate of
Amendment filed with the Secretary of State on December 19, 1996. The Amended
and Restated Certificate of Incorporation was again amended by a Certificate of
Amendment filed with the Secretary of State on June 20, 1997. The Amended and
Restated Certificate of Incorporation was again amended by a Certificate of
Amendment filed with the Secretary of State on March 26, 1998. The Amended and
Restated Certificate of Incorporation was again amended by a Certificate of
Amendment filed with the Secretary of State on May 28, 1998. The Amended and
Restated Certificate of Incorporation was again amended by a Certificate of
Amendment filed with the Secretary of State on April 2, 1999. The Amended and
Restated Certificate of Incorporation was again amended by a Certificate of
Amendment filed with the Secretary of State on _________ __, 1999.
3. The Board of Directors of the Corporation, at a meeting duly called
and held on _________ __, 1999, duly adopted the following resolution, declaring
such advisable, and declaring that such amendment and restatement to the Amended
and Restated Certificate of Incorporation of the Corporation be submitted for
consideration to the stockholders of the Corporation entitled to vote in respect
thereof. The resolution is as follows:
RESOLVED: That the Amended and Restated Certificate of
Incorporation of the Corporation be amended and
restated, so that, as amended and restated, the
Amended and Restated Certificate of Incorporation of
the Corporation shall be and read in its entirety as
follows:
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
HEALTHGATE DATA CORP.
ARTICLE I
---------
The name of the Corporation is HEALTHGATE DATA CORP.
ARTICLE II
----------
The address of the corporation's registered office in the State of
Delaware is 1209 Orange Street, Wilmington, Delaware 19801, County of New
Castle. The name of its registered agent at such address is Corporation Trust
Company.
ARTICLE III
-----------
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware.
ARTICLE IV
----------
The total number of shares of all classes of capital stock which the
Corporation shall have authority to issue shall be 110,000,000, consisting of
(i) 100,000,000 shares of common stock, par value $.01 per share ("Common
Stock"), and (ii) 10,000,000 shares of preferred stock, par value $.01 per share
("Preferred Stock").
The following is a statement of the designations and the powers,
privileges and rights, and the qualifications, limitations or restrictions
thereof in respect of each class of capital stock of the Corporation:
A. COMMON STOCK
1. GENERAL. The voting, dividend and liquidation rights of the holders
of the Common Stock are subject to and qualified by the rights of the holders of
the Preferred Stock of any series as may be designated by the Board of Directors
upon any issuance of the Preferred Stock of any series.
2
<PAGE>
2. VOTING. The holders of Common Stock will be entitled to one vote per
share on all matters to be voted on by the stockholders of the Corporation.
There shall be no cumulative voting.
3. DIVIDENDS. Dividends may be declared and paid on the Common Stock
from funds lawfully available therefore as and when determined by the Board of
Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
4. LIQUIDATION. Upon the dissolution or liquidation of the Corporation,
whether voluntary or involuntary, holders of Common Stock will be entitled to
receive all assets of the Corporation available for distribution to its
stockholders, subject to any preferential liquidation rights of any then
outstanding Preferred Stock.
B. PREFERRED STOCK
Preferred Stock may be issued from time to time in one or more series,
each of such series to have such terms as stated or expressed herein and in the
resolution or resolutions providing for the issue of such series adopted by the
Board of Directors of the Corporation as hereinafter provided. No share of
Preferred Stock that is redeemed, purchased or acquired by the Corporation may
be reissued except as otherwise provided herein or by law. Different series of
Preferred Stock shall not be construed to constitute different classes of shares
for the purposes of voting by classes unless expressly provided herein, in any
such resolution or resolutions, or by law.
Authority is hereby expressly granted to the Board of Directors from
time to time to issue the Preferred Stock in one or more series, and in
connection with the creation of any such series, by resolution or resolutions
providing for the issue of the shares thereof, to determine and fix such voting
powers, full or limited, or no voting powers, and such designations, preferences
and relative participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, including without
limitation thereof, dividend rights, conversion rights, redemption privileges
and liquidation preferences, as shall be stated and expressed in such
resolutions, all to the full extent now or hereafter permitted by the General
Corporation Law of the State of Delaware. Without limiting the generality of the
foregoing, the resolutions providing for issuance of any series of Preferred
Stock may provide that such series shall be superior or rank equally or be
junior to the Preferred Stock of any other series to the extent permitted by
law. Except as otherwise provided by law or by this Amended and Restated
Certificate of Incorporation, no vote of the holders of the Preferred Stock or
Common Stock shall be a prerequisite to the issuance of any shares of any series
of the Preferred Stock authorized by and complying with the conditions of the
Amended and Restated Certificate of Incorporation, the right to have such vote
being expressly waived by all present and future holders of the capital stock of
the Corporation.
3
<PAGE>
ARTICLE V
---------
In furtherance of and not in limitation of powers conferred by statute,
it is further provided that:
(a) Subject to the limitations and exceptions, if any,
contained in the by-laws of the Corporation, the by-laws may be adopted, amended
or repealed by the Board of Directors of the Corporation.
(b) Elections of directors need not be by written ballot.
(c) Subject to any applicable requirements of law, the books
of the Corporation may be kept outside the State of Delaware at such location as
may be designated by the Board of Directors or in the by-laws of the
Corporation.
ARTICLE VI
----------
The number of directors which shall constitute the whole board of
directors of the Corporation shall not be less than two nor more than fifteen,
except that whenever there shall be only one stockholder, such number shall be
not less than one. Within the foregoing limits, the number of directors shall be
determined by resolution of the board of directors and may be increased or
decreased at any time or from time to time by the directors by vote of a
majority of directors then in office, except that any such decrease by vote of
the directors shall only be made to eliminate vacancies existing by reason of
the death, resignation or removal of one or more directors. The board of
directors shall be divided into three classes: Class I, Class II and Class III,
each having as nearly as possible the same number of directors. If a fraction is
contained in the quotient arrived at by dividing the designated number of
directors by three, then, if such fraction is one-third, the extra director
shall be a member of Class III, and if such fraction is two-thirds, one of the
extra directors shall be a member of Class II and the other shall be a member of
Class III, unless otherwise provided from time to time by resolution adopted by
the board of directors. Each director shall serve for a term ending on the date
of the third annual meeting following the annual meeting at which such director
was elected; provided, that each initial director in Class I shall serve for a
term ending on the date of the annual meeting in 2000; each initial director in
Class II shall serve for a term ending on the date of the annual meeting in
2001; and each initial director in Class III shall serve for a term ending on
the date of the annual meeting in 2002; and provided further, that the term of
each director shall be subject to the election and qualification of his or her
successor and to his or her earlier death, resignation or removal. No director
who is a part of Class I, Class II or Class III may be removed except for cause
and with the affirmative vote of at least seventy-five percent (75%) of the
shares of capital stock of the Corporation outstanding and entitled to vote
generally in the election of directors, considered for this purpose as a single
class.
4
<PAGE>
In the event of any increase or decrease in the authorized number of
directors, (a) each director then serving as such shall nevertheless continue as
a director of the class of which he or she is a member, and (b) the newly
created or eliminated directorships resulting from such increase or decrease
shall be apportioned by the board of directors among the three classes of
directors so as to ensure that the classes have as nearly as possible the same
number of directors. To the extent possible, consistent with the foregoing rule,
any newly created directorships shall be added to those classes whose terms of
office are to expire at the latest dates following such allocation, and any
newly eliminated directorships shall be subtracted from those classes whose
terms of offices are to expire at the earliest dates following such allocation,
unless otherwise provided from time to time by resolution adopted by the board
of directors.
Vacancies and newly created directorships resulting from any increase
in the authorized number of directors or from any other cause (other than
vacancies and newly created directorships which the holders of any class or
classes of stock or series thereof are expressly entitled by this Amended and
Restated Certificate of Incorporation to fill), shall be filled by the vote of a
majority of the directors then in office, although less than a quorum, or by the
sole remaining director. When one or more directors shall resign from the board,
effective at a future date, a majority of the directors then in office,
including those who have resigned, shall have power to fill such vacancy or
vacancies, the vote or action by writing thereon to take effect when such
resignation or resignations shall become effective. A director elected to fill a
vacancy shall hold office until the next election of the class for which such
director has been chosen, subject to the election and qualification of his or
her successor and to his or her earlier death, resignation or removal.
Notwithstanding the foregoing, in the event that the holders of any
class or series of Preferred Stock of the Corporation shall be entitled, voting
separately as a class, to elect any directors of the Corporation, then the
number of directors that may be elected by such holders voting separately as a
class shall be in addition to the number fixed pursuant to a resolution of the
board of directors of the Corporation. Except as otherwise provided in the terms
of such class or series, (i) the terms of the directors elected by such holders
voting separately as a class shall expire at the annual meeting of stockholders
next succeeding their election without regard to the classification of other
directors and (ii) any director or directors elected by such holders voting
separately as a class may be removed, with or without cause, by the holders of a
majority of the voting power of all outstanding shares of stock of the
Corporation entitled to vote separately as a class in an election of such
directors.
ARTICLE VII
-----------
The Corporation is to have perpetual existence.
5
<PAGE>
ARTICLE VIII
------------
The Corporation shall indemnify each person who at any time is, or
shall have been a director or officer of the Corporation, and is threatened to
be or is made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he is, or was, a director or officer of the Corporation, or
served at the request of the Corporation as a director, officer, employee,
trustee, or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement incurred in connection with any such action, suit
or proceeding to the maximum extent permitted by the General Corporation Law of
the State of Delaware. The foregoing right of indemnification shall in no way be
exclusive of any other rights of indemnification to which any such director or
officer may be entitled, under any by-law, agreement, vote of directors or
stockholders or otherwise. No amendments to or repeal of the provisions of this
paragraph shall deprive a person of the benefit of this paragraph with respect
to any act or failure to act of such director occurring prior to such amendment
or repeal.
ARTICLE IX
----------
Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as a consequence of such compromise or
arrangements, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders of this Corporation, as the case may be,
and also on this Corporation.
ARTICLE X
---------
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
6
<PAGE>
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.
ARTICLE XI
----------
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute and this
Amended and Restated Certificate of Incorporation, and all rights conferred upon
stockholders herein are granted subject to this reservation.
ARTICLE XII
-----------
Any action required or permitted to be taken by the stockholders of the
Corporation must be effected at a duly constituted annual or special meeting of
stockholders and may not be effected by any consent in writing by such
stockholders.
ARTICLE XIII
------------
Notwithstanding any other provisions of law, this Amended and Restated
Certificate of Incorporation or the by-laws of the Corporation, each as amended,
and notwithstanding the fact that a lesser percentage may be specified by law,
the affirmative vote of the holders of at least seventy-five (75%) of the shares
of capital stock of the Corporation issued and outstanding and entitled to vote
shall be required to amend or repeal, or to adopt any provision inconsistent
with, Article VI, Article XII or this Article XIII.
4. The stockholders of the Corporation have duly approved the amendment
and restatement of the Corporation's Amended and Restated Certificate of
Incorporation as set forth in Section 3 above by the required vote of such
stockholders, adopted by the written consent of a majority in interest of each
class of stockholders in accordance with Sections 228, 242 and 245 of the
General Corporation Law of the State of Delaware. Prompt written notice of the
adoption of the amendment and restatement herein certified has been given to
those stockholders who have not consented in writing thereto, as provided in
Section 228 of the General Corporation Law of the State of Delaware.
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7
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed hereto and this Amended and Restated Certificate of Incorporation to be
signed by its President and attested by its Assistant Secretary this __ day of
_______, 1999.
HEALTHGATE DATA CORP.
[CORPORATE SEAL]
By:
---------------------------------
William S. Reece, President
ATTEST:
By:
--------------------------
Stephen M. Kane
Assistant Secretary
8
<PAGE>
Exhibit 3.5
HEALTHGATE DATA CORP.
SECOND AMENDED AND RESTATED BYLAWS
(effective ________, 1999)
Section 1. CERTIFICATE OF INCORPORATION AND BYLAWS
1.1 These bylaws are subject to the certificate of incorporation of the
corporation. In these bylaws, references to the certificate of incorporation and
bylaws mean the provisions of the certificate of incorporation and the bylaws as
are from time to time in effect.
Section 2. OFFICES
2.1 REGISTERED OFFICE. The registered office shall be in the City of
Wilmington, County of New Castle, State of Delaware.
2.2 OTHER OFFICES. The corporation may also have offices at such other
places both within and without the State of Delaware as the board of directors
may from time to time determine or the business of the corporation may require.
Section 3. STOCKHOLDERS
3.1 LOCATION OF MEETINGS. All meetings of the stockholders shall be
held at such place either within or without the State of Delaware as shall be
designated from time to time by the board of directors. Any adjourned session of
any meeting shall be held at the place designated in the vote of adjournment.
3.2 ANNUAL MEETING. The annual meeting of stockholders shall be held on
the fourth Tuesday in June in each year (the "Specified Date"), or on such other
date as shall be designated from time to time by the board of directors, at
which the stockholders shall elect a board of directors and transact such other
business as may be required by law or these bylaws or as may properly come
before the meeting.
3.3 SPECIAL MEETING IN PLACE OF ANNUAL MEETING. If the election for
directors shall not be held on the day designated by these bylaws, the directors
shall cause the election to be held as soon thereafter as convenient, and to
that end, if the annual meeting is omitted on the day herein provided therefor
or if the election of directors shall not be held thereat, a special meeting of
the stockholders may be held in place of such omitted meeting or election, and
any business transacted or election held at such special meeting shall have the
same effect as if transacted or held at the annual meeting, and in such case all
references in these bylaws to the annual meeting of the stockholders, or to the
annual election of directors, shall be deemed to refer to or include such
special meeting. Any such special meeting shall be called and the purposes
thereof shall be specified in the call, as provided in SECTION 3.4.
<PAGE>
3.4 NOTICE OF ANNUAL MEETING. Written notice of the annual meeting
stating the place, date and hour of the meeting shall be given to each
stockholder entitled to vote at such meeting not less than ten nor more than
sixty days before the date of the meeting. Such notice may specify the business
to be transacted and actions to be taken at such meeting. No action shall be
taken at such meeting unless such notice is given, or unless waiver of such
notice is given by the holders of outstanding stock having not less than the
minimum number of votes necessary to take such action at a meeting at which all
shares entitled to vote thereon were voted. Prompt notice of all action taken in
connection with such waiver of notice shall be given to all stockholders not
present or represented at such meeting.
3.5 OTHER SPECIAL MEETINGS. Special meetings of the stockholders, for
any purpose or purposes, unless otherwise prescribed by law or by the
certificate of incorporation, may be called by the chief executive officer of
the corporation and shall be called by the chief executive officer or secretary
of the corporation at the request in writing of a majority of the board of
directors. Such request shall state the purpose or purposes of the proposed
meeting and business to be transacted at any special meeting of the
stockholders. Business transacted at any special meeting of stockholders shall
be limited to matters relating to the purpose or purposes stated in the notice
of meeting.
3.6 NOTICE OF SPECIAL MEETING. Written notice of a special meeting
stating the place, date and hour of the meeting and the purpose or purposes for
which the meeting is called, shall be given not less than ten nor more than
sixty days before the date of the meeting, to each stockholder entitled to vote
at such meeting. No action shall be taken at such meeting unless such notice is
given, or unless waiver of such notice is given by the holders of outstanding
stock having not less than the minimum number of votes necessary to take such
action at a meeting at which all shares entitled to vote thereon were voted.
Prompt notice of all action taken in connection with such waiver of notice shall
be given to all stockholders not present or represented at such meeting.
3.7 NOTICE OF STOCKHOLDER BUSINESS AT ANNUAL MEETING. The following
provisions of this SECTION 3.7 shall apply to the conduct of business at any
annual meeting of the stockholders. (As used in this SECTION 3.7, the term
annual meeting shall include a special meeting in lieu of an annual meeting.)
(a) At any annual meeting of the stockholders, only such business shall
be conducted as shall have been brought before the meeting (i) pursuant to the
corporation's notice of meeting, (ii) by or at the direction of the board of
directors, or (iii) by any stockholder of the corporation who is a stockholder
of record at the time of giving of the notice provided for in SECTION 3.7(b),
who is entitled to vote at such meeting and who has complied with the notice
procedures set forth in SECTION 3.7(b).
2
<PAGE>
(b) For business to be properly brought before any annual meeting of
the stockholders by a stockholder pursuant to clause (iii) of SECTION 3.7(a),
the stockholder must have given timely notice thereof in writing to the
secretary of the corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
corporation not less than sixty (60) days prior to the date for such annual
meeting; provided, however, that if the annual meeting of stockholders is to be
held on a date prior to the Specified Date, and if less than seventy (70) days'
notice or prior public disclosure of the date of such annual or special meeting
is given or made, notice by the stockholder to be timely must be so delivered or
received not later than the close of business on the tenth (10th) day following
the earlier of the date on which notice of the date of such meeting was mailed
or the day on which public disclosure was made of the date of such meeting. A
stockholder's notice to the secretary of the corporation shall set forth as to
each matter the stockholder proposes to bring before the annual meeting (i) a
brief description of the business desired to be brought before the meeting and
the reasons for conducting such business at the meeting, (ii) the name and
address, as they appear on the corporation's books, of the stockholder proposing
such business, the name and address of the beneficial owner, if any, on whose
behalf the proposal is made, and the name and address of any other stockholders
or beneficial owners known by such stockholder to be supporting such proposal,
(iii) the class and number of shares of the corporation which are owned
beneficially and of record by such stockholder of record, by the beneficial
owner, if any, on whose behalf the proposal is made and by any other
stockholders or beneficial owners known by such stockholder to be supporting
such proposal, and (iv) any material interest of such stockholder of record
and/or of the beneficial owner, if any, on whose behalf the proposal is made, in
such proposed business and any material interest of any other stockholders or
beneficial owners known by such stockholder to be supporting such proposal in
such proposed business, to the extent known by such stockholder.
(c) Notwithstanding anything in these bylaws to the contrary, no
business shall be conducted at an annual meeting except in accordance with the
procedures set forth in this SECTION 3.7. The person presiding at the annual
meeting shall, if the facts warrant, determine that business was not properly
brought before the meeting and in accordance with the procedures prescribed by
these bylaws, and if he or she should so determine, he or she shall so declare
at the meeting and any such business not properly brought before the meeting
shall not be transacted. Notwithstanding the foregoing provisions of this
SECTION 3.7, a stockholder shall also comply with all applicable requirements of
the Securities Exchange Act of 1934, as amended (or any successor provision),
and the rules and regulations thereunder with respect to the matters set forth
in this SECTION 3.7.
(d) This provision shall not prevent the consideration and approval or
disapproval at an annual meeting of reports of officers, directors and
committees of the board of directors, but, in connection with such reports, no
new business shall be acted upon at such meeting unless properly brought before
the meeting as herein provided.
3
<PAGE>
3.8 STOCKHOLDER LIST. The officer who has charge of the stock ledger of
the corporation shall prepare and make, at least ten days before every meeting
of stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
3.9 QUORUM OF STOCKHOLDERS. The holders of a majority of the stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business except as otherwise required by
law, or by the certificate of incorporation or by these bylaws. Except as
otherwise provided by law, no stockholder present at a meeting may withhold his
or her shares from the quorum count by declaring his or her shares absent from
the meeting.
3.10 ADJOURNMENT. Any meeting of stockholders may be adjourned from
time to time to any other time and to any other place at which a meeting of
stockholders may be held under these bylaws, which time and place shall be
announced at the meeting, by a majority of votes cast upon the question, whether
or not a quorum is present. At such adjourned meeting at which a quorum shall be
present or represented any business may be transacted which might have been
transacted at the original meeting. If the adjournment is for more than thirty
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting.
3.11 PROXY REPRESENTATION. Every stockholder may authorize another
person or persons to act for him or her by proxy in all matters in which a
stockholder is entitled to participate, whether by waiving notice of any
meeting, objecting to or voting or participating at a meeting, or expressing
consent or dissent without a meeting. Every proxy must be signed by the
stockholder or by his or her attorney-in-fact. No proxy shall be voted or acted
upon after three years from its date unless such proxy provides for a longer
period. Except as provided by law, a revocable proxy shall be deemed revoked if
the stockholder is present at the meeting for which the proxy was given. A duly
executed proxy shall be irrevocable if it states that it is irrevocable and, if,
and only as long as, it is coupled with an interest sufficient in law to support
an irrevocable power. A proxy may be made irrevocable regardless of whether the
interest with which it is coupled is an interest in the stock itself or an
interest in the corporation generally. The authorization of a proxy may, but
need not, be limited to specified action, provided, however, that if a proxy
limits its authorization to a meeting or meetings of stockholders, unless
otherwise specifically provided such proxy shall entitle the holder thereof to
vote at any adjourned session but shall not be valid after the final adjournment
thereof.
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3.12 INSPECTORS. The directors or the person presiding at the meeting
may, but need not, appoint one or more inspectors of election and any substitute
inspectors to act at the meeting or any adjournment thereof. Each inspector,
before entering upon the discharge of his or her duties, shall take and sign an
oath faithfully to execute the duties of inspector at such meeting with strict
impartiality and according to the best of his or her ability. The inspectors, if
any, shall determine the number of shares of stock outstanding and the voting
power of each, the shares of stock represented at the meeting, the existence of
a quorum and the validity and effect of proxies, and shall receive votes,
ballots or consents, hear and determine all challenges and questions arising in
connection with the right to vote, count and tabulate all votes, ballots or
consents, determine the result, and do such acts as are proper to conduct the
election or vote with fairness to all stockholders. On request of the person
presiding at the meeting, the inspectors shall make a report in writing of any
challenge, question or matter determined by them and execute a certificate of
any fact found by them.
3.13 ACTION BY VOTE. When a quorum is present at any meeting, whether
the same be an original or an adjourned session, a plurality of the votes
properly cast for election to any office shall elect to such office and a
majority of the votes properly cast upon any question other than an election to
an office shall decide the question, except when a larger vote is required by
law, by the certificate of incorporation or by these bylaws. No ballot shall be
required for any election unless requested by a stockholder present or
represented at the meeting and entitled to vote in the election.
3.14 NO ACTION BY WRITTEN CONSENT. Any action required or permitted to
be taken by the stockholders of the corporation must be effected at a duly
constituted annual or special meeting of such stockholders and may not be
effected by any consent in writing by such stockholders.
Section 4. DIRECTORS
4.1 POWERS. The business of the corporation shall be managed by or
under the direction of the board of directors which shall have and may exercise
all the powers of the corporation and do all such lawful acts and things as are
not by law, the certificate of incorporation or these bylaws directed or
required to be exercised or done by the stockholders.
4.2 NUMBER; QUALIFICATIONS. Within the limits set forth in the
certificate of incorporation, the number of directors shall be determined by
resolution of the board of directors and may be increased or decreased at any
time or from time to time by the directors by vote of a majority of directors
then in office, except that any such decrease by vote of the directors shall
only be made to eliminate vacancies existing by reason of the death, resignation
or removal of one or more directors. If the holders of any class or classes of
stock or series thereof are entitled by the certificate of incorporation to
elect one or more directors, the preceding sentence shall not apply to such
directors and the number of such directors shall be as provided in the
certificate of incorporation. Directors need not be stockholders.
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4.3 ELECTION, TERM OF OFFICE; RESIGNATION; REMOVAL; VACANCIES. Except
as provided in the certificate of incorporation, the directors shall be elected
at the annual meeting of the stockholders. Each director shall hold office until
the next election of the class or category for which such director shall have
been chosen, and until his or her successor is elected and qualified or until
his or her earlier resignation or removal. Any director may resign at any time
by delivering his or her resignation in writing to the chairman or the secretary
or to a meeting of the board of directors. Such resignation shall be effective
upon receipt unless specified to be effective at some other time; and without in
either case the necessity of its being accepted unless the resignation shall so
state. No director resigning and (except where a right to receive compensation
shall be expressly provided in a duly authorized written agreement with the
corporation) no director removed shall have any right to receive compensation as
such director for any period following his or her resignation or removal, or any
right to damages on account of such removal, whether his or her compensation be
by the month or by the year or otherwise; unless in the case of a resignation,
the directors, or in the case of removal, the body acting on the removal, shall
in their or its discretion provide for compensation. No director may be removed
except as provided in the certificate of incorporation. Vacancies and newly
created directorships resulting from any increase in the authorized number of
directors (other than any directors elected in the manner described in the next
sentence) or from any other cause shall be filled by, and only by, a majority of
the directors then in office, although less than a quorum, or by the sole
remaining director. Whenever the holders of any class or classes of stock or
series thereof are entitled by the certificate of incorporation to elect one or
more directors, vacancies and newly created directorships of such class or
classes or series may be filled by, and only by, a majority of the directors
elected by such class or classes or series then in office, or by the sole
remaining director so elected. Any director elected or appointed to fill a
vacancy or a newly created directorship shall hold office until the next
election of the class of directors of the director which such director replaced
or the class of directors to which such director was appointed, and until his or
her successor is elected and qualified or until his or her earlier resignation
or removal.
4.4 NOMINATION OF DIRECTORS. The following provisions of this SECTION
4.4 shall apply to the nomination of persons for election to the board of
directors at any annual meeting or special meeting of stockholders.
(a) Nominations of persons for election to the board of directors of
the corporation at any annual meeting or special meeting of stockholders may be
made (i) by or at the direction of the board of directors or (ii) by any
stockholder of the corporation who is a stockholder of record at the time of
giving of notice provided for in SECTION 4.4(b), who is entitled to vote for the
election of directors at the meeting and who has complied with the notice
procedures set forth in SECTION 4.4(b).
(b) Nominations by stockholders shall be made pursuant to timely notice
in writing to the secretary of the corporation. To be timely, a stockholder's
notice shall be delivered to or mailed and received at the principal executive
offices of the corporation, not less than sixty (60) days
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prior to the date for the annual meeting; provided, however, that if the annual
meeting of stockholders or a special meeting in lieu thereof is to be held on a
date prior to the Specified Date, and if less than seventy (70) days' notice or
prior public disclosure of the date of such annual or special meeting is given
or made, notice by the stockholder to be timely must be so delivered or received
not later than the close of business on the tenth (10th) day following the
earlier of the day on which notice of the date of such annual or special meeting
was mailed or the day on which public disclosure was made of the date of such
annual or special meeting. Such stockholder's notice shall set forth (i) as to
each person whom the stockholder proposes to nominate for election or reelection
as a director all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is otherwise
required, pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended, or pursuant to any other then existing statute, rule or regulation
applicable thereto (including such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if elected); (ii)
as to the stockholder giving the notice (A) the name and address, as they appear
on the corporation's books, of such stockholder and (B) the class and number of
shares of the corporation which are beneficially owned by such stockholder and
also which are owned of record by such stockholder; and (iii) as to the
beneficial owner, if any, on whose behalf the nomination is made, (A) the name
and address of such person and (B) the class and number of shares of the
corporation which are beneficially owned by such person. The corporation may
require any proposed nominee to furnish such other information as may reasonably
be required by the corporation to determine the eligibility of such proposed
nominee as a director. At the request of the board of directors, any person
nominated by the board of directors for election as a director shall furnish to
the secretary of the corporation that information required to be set forth in a
stockholder's notice of nomination which pertains to the nominee.
(c) No person shall be eligible for election as a director of the
corporation at any annual meeting or special meeting of stockholders unless
nominated in accordance with the procedures set forth in this SECTION 4.4. The
person presiding at the meeting shall, if the facts warrant, determine that a
nomination was not made in accordance with the procedures prescribed by these
bylaws, and if he or she should so determine, he or she shall so declare to the
meeting and the defective nomination shall be disregarded. Notwithstanding the
foregoing provisions of this SECTION 4.4, a stockholder shall also comply with
all applicable requirements of the Securities Exchange Act of 1934, as amended
(or any successor provision), and the rules and regulations thereunder with
respect to the matters set forth in this bylaw.
4.5 COMMITTEES. The board of directors may, by vote of a majority of
the whole board, (a) designate, change the membership of or terminate the
existence of any committee or committees, each committee to consist of one or
more of the directors; (b) designate one or more directors as alternate members
of any such committee who may replace any absent or disqualified member at any
meeting of the committee; and (c) determine the extent to which each such
committee shall have and may exercise the powers and authority of the board of
directors in the management of the business and affairs of the corporation,
including the power to authorize the seal of the corporation to be affixed to
all papers which require it and the power and authority to
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declare dividends or to authorize the issuance of stock; excepting, however,
such powers which by law, by the certificate of incorporation or by these bylaws
they are prohibited from so delegating. In the absence or disqualification of
any member of such committee and his or her alternate, if any, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not constituting a quorum, may unanimously appoint another member of the
board of directors to act at the meeting in the place of any such absent or
disqualified member. Except as the board of directors may otherwise determine,
any committee may make rules for the conduct of its business, but unless
otherwise provided by the board or such rules, its business shall be conducted
as nearly as may be in the same manner as is provided by these bylaws for the
conduct of business by the board of directors. Each committee shall keep regular
minutes of its meetings and report the same to the board of directors upon
request.
4.6 REGULAR MEETING. Regular meetings of the board of directors may be
held without call or notice at such place within or without the State of
Delaware and at such times as the board may from time to time determine,
provided that notice of the first regular meeting following any such
determination shall be given to absent directors. A regular meeting of the
directors may be held without call or notice immediately after and at the same
place as the annual meeting of the stockholders.
4.7 SPECIAL MEETINGS. Special meetings of the board of directors may be
held at any time and at any place within or without the State of Delaware
designated in the notice of the meeting, when called by the chief executive
officer of the corporation, or by one-third or more in number of the directors,
reasonable notice thereof being given to each director by the secretary or by
the chief executive officer of the corporation or by any one of the directors
calling the meeting.
4.8 NOTICE OF SPECIAL MEETINGS. Notice of any special meeting of
directors shall be given to each director by the secretary or by the officer or
one of the directors calling the meeting. Notice shall be duly given to each
director (i) by giving notice to such director in person or by telephone at
least 24 hours in advance of the meeting, (ii) by sending a telegram, fax or
telex, or by delivering written notice by hand, to his or her last known
business address at least 24 hours in advance of the meeting, or (iii) by
mailing written notice to his or her last known business or home address at
least 72 hours in advance of the meeting. Neither notice of a special meeting
nor a waiver of a notice of a special meeting need specify the purposes of the
meeting.
4.9 QUORUM. Except as may be otherwise provided by law, by the
certificate of incorporation or by these bylaws, at any meeting of the
directors, a majority of the directors then in office shall constitute a quorum.
In the event one or more of the directors shall be disqualified to vote at any
meeting, then the required quorum shall be reduced by one for each director so
disqualified, provided that a quorum shall not in any case be less than
one-third of the total number of directors constituting the whole board. Any
meeting may be adjourned from time to time by a majority of the votes cast upon
the question, whether or not a quorum is present, and the meeting may be held as
adjourned without any requirement to satisfy any of the notice requirements
applicable to such original meeting prior to such adjournment.
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4.10 ACTION BY VOTE. Except as may be otherwise provided by law, by the
certificate of incorporation or by these bylaws, when a quorum is present at any
meeting, the vote of a majority of the directors present shall be the act of the
board of directors.
4.11 ACTION WITHOUT A MEETING. Unless otherwise restricted by the
certificate of incorporation or by these bylaws, any action required or
permitted to be taken at any meeting of the board of directors or of any
committee thereof may be taken without a meeting if all the members of the board
or of such committee, as the case may be, consent thereto in writing, and such
writing or writings are filed with the records of the meetings of the board or
of such committee. Such consent shall be treated for all purposes as the act of
the board or of such committee, as the case may be.
4.12 PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE. Unless
otherwise restricted by the certificate of incorporation or by these bylaws,
members of the board of directors or of any committee thereof may participate in
a meeting of such board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other. Such participation shall constitute presence in
person at such meeting.
4.13 COMPENSATION. Directors may be paid such compensation for their
services and such reimbursement for expenses of attendance at meetings as the
board of directors may from time to time determine. No such payment shall
preclude any director from serving the corporation or its parent or subsidiary
corporations in any other capacity and receiving compensation therefor.
4.14 INTERESTED DIRECTORS AND OFFICERS.
(a) No contract or transaction between the corporation and one or more
of its directors or officers, or between the corporation and any other
corporation, partnership, association, or other organization in which one or
more of the corporation's directors or officers are directors or officers, or
have a financial interest, shall be void or voidable solely for this reason, or
solely because the director or officer is present at or participates in the
meeting of the board of directors or committee thereof which authorizes the
contract or transaction, or solely because his, her or their votes are counted
for such purpose.
(b) Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the board of directors or of a committee
which authorizes the contract or transaction.
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Section 5. NOTICES
5.1 FORM OF NOTICE. Whenever, under the provisions of law, or of the
certificate of incorporation or of these bylaws, notice is required to be given
to any director or stockholder, such notice may be given by mail, addressed to
such director or stockholder, at his or her address as it appears on the records
of the corporation, with postage thereon prepaid, and such notice shall be
deemed to be given at the time when the same shall be deposited in the United
States mail. Unless written notice by mail is required by law, written notice
may also be given by telegram, cable, fax, telecopy, commercial delivery
service, telex or similar means, addressed to such director or stockholder at
his or her address as it appears on the records of the corporation, in which
case such notice shall be deemed to be given when delivered into the control of
the persons charged with effecting such transmission, the transmission charge to
be paid by the corporation or the person sending such notice and not by the
addressee. Oral notice or other in-hand delivery (in person or by telephone)
shall be deemed given at the time it is actually given.
5.2 WAIVER OF NOTICE. Whenever notice is required to be given under the
provisions of law, the certificate of incorporation or these bylaws, a written
waiver thereof, signed by the person entitled to notice, whether before or after
the time stated therein, shall be deemed equivalent to notice. Attendance of a
person at a meeting shall constitute a waiver of notice of such meeting, except
when the person attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened and such person does not thereafter vote on
or assent to any action taken at such meeting. Neither the business to be
transacted at, nor the purpose of, any meeting of the stockholders, directors or
members of a committee of the directors need be specified in any written waiver
of notice.
Section 6. OFFICERS AND AGENTS
6.1 ENUMERATION; QUALIFICATION. The officers of the corporation shall
be a chairman of the board, a chief executive officer and/or a president, a
treasurer, a secretary and such other officers, if any, as the board of
directors from time to time may in its discretion elect or appoint including
without limitation one or more vice presidents. Any officer may be, but none
need be, a director or stockholder. Any two or more offices may be held by the
same person. Any officer may be required by the board of directors to secure the
faithful performance of his or her duties to the corporation by giving bond in
such amount and with sureties or otherwise as the board of directors may
determine.
6.2 POWERS. Subject to law, to the certificate of incorporation and to
the other provisions of these bylaws, each officer shall have, in addition to
the duties and powers herein set forth, such duties and powers as are commonly
incident to his or her office and such additional duties and powers as the board
of directors may from time to time designate.
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6.3 ELECTION. The board of directors at its first meeting after each
annual meeting of stockholders shall choose a chairman of the board, a chief
executive officer and/or a president, a treasurer, and a secretary. Other
officers may be appointed by the board of directors at such meeting, at any
other meeting or by written consent. At any time or from time to time, the
directors may delegate to any officer their power to elect or appoint any other
officer or any agents.
6.4 TENURE. Each officer shall hold office until the first meeting of
the board of directors following the next annual meeting of the stockholders and
until his or her successor is elected and qualified unless a shorter period
shall have been specified in terms of his or her election or appointment, or in
each case until he or she sooner dies, resigns, is removed or becomes
disqualified. Each agent of the corporation shall retain his or her authority at
the pleasure of the directors, or the officer by whom he or she was appointed or
by the officer who then holds agent appointive power.
6.5 CHAIRMAN OF THE BOARD. The Chairman of the Board shall have the
power to preside at all meetings of the board of directors and shall have such
other powers and duties as provided in these bylaws and as the board of
directors may from time to time prescribe.
6.6 CHIEF EXECUTIVE OFFICER. Subject to the control of the board of
directors and such supervisory powers, if any, as may be given by the board of
directors, the powers and duties of the chief executive officer of the
corporation are:
(a) To act as the general manager and, subject to the control of the
board of directors, to have general supervision, direction and control of the
business and affairs of the corporation;
(b) To preside at all meetings of the stockholders;
(c) To call meetings of the stockholders to be held at such times and,
subject to the limitations prescribed by law or by these bylaws, at such places
as he or she shall deem proper; and
(d) To affix the signature of the corporation to all deeds,
conveyances, mortgages, guarantees, leases, obligations, bonds, certificates and
other papers and instruments in writing which have been authorized by the board
of directors or which, in the judgment of the chief executive officer, should be
executed on behalf of the corporation; and, subject to the direction of the
board of directors, to have general charge of the property of the corporation
and to supervise and control all officers, agents and employees of the
corporation.
The president shall be the chief executive officer of the corporation unless the
board of directors shall designate another officer to be the chief executive
officer. If there is no president, and the board of directors has not designated
any other officer to be the chief
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executive officer, then the chairman of the board shall be the chief executive
officer.
6.7 PRESIDENT. The President shall be the chief executive officer of
the corporation unless the board of directors shall have designated another
officer as the chief executive officer of the corporation. Subject to the
provisions of these bylaws and to the direction of the board of directors, and
subject to the supervisory powers of the chief executive officer (if the chief
executive officer is an officer other than the president), and subject to such
supervisory powers and authority as may be given by the board of directors to
the chairman of the board, and/or to any other officer, the president shall have
the responsibility for the general management of the corporation and the general
supervision and direction of all of the officers, employees and agents of the
corporation (other than the chief executive officer, if the chief executive
officer is an officer other than the president) and shall perform all duties and
have all powers that are commonly incident to the office of president or that
are delegated to the president by the board of directors.
6.8 VICE PRESIDENT. Each vice president shall have all such powers and
duties as are commonly incident to the office of vice president, or that are
delegated to him or her by the board of directors or the chief executive
officer. A vice president may be designated by the board of directors to perform
the duties and exercise the powers of the chief executive officer in the event
of the chief executive officer's absence or disability.
6.9 TREASURER AND ASSISTANT TREASURERS. The treasurer shall be the
chief financial officer of the corporation and shall be in charge of its funds
and valuable papers, and shall have such other duties and powers as may be
assigned to him or her from time to time by the board of directors or by the
chief executive officer.
Any assistant treasurers shall have such duties and powers as shall be
designated from time to time by the board of directors, the chief executive
officer or the treasurer.
6.10 SECRETARY AND ASSISTANT SECRETARIES. The secretary shall record
all proceedings of the stockholders, of the board of directors and of committees
of the board of directors in a book or series of books to be kept therefor and
shall file therein all writings of, or related to, action by stockholder or
director consent. In the absence of the secretary from any meeting, an assistant
secretary, or if there is none or he or she is absent, a temporary secretary
chosen at the meeting, shall record the proceedings thereof. Unless a transfer
agent has been appointed, the secretary shall keep or cause to be kept the stock
and transfer records of the corporation, which shall contain the names and
record addresses of all stockholders and the number of shares registered in the
name of each stockholder. The secretary shall have such other duties and powers
as may from time to time be designated by the board of directors or the chief
executive officer and shall be authorized to certify as to the corporate records
of the corporation.
Any assistant secretaries shall have such duties and powers as shall be
designated from time to time by the board of directors, the chief executive
officer or the secretary, including,
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without limitation, the authority to certify as to the corporate records of the
corporation.
6.11 RESIGNATION AND REMOVAL. Any officer may resign at any time by
delivering his or her resignation in writing to the chief executive officer or
the secretary or to a meeting of the board of directors. Such resignation shall
be effective upon receipt unless specified to be effective at some other time,
and without in any case the necessity of its being accepted unless the
resignation shall so state. The board of directors may at any time remove any
officer either with or without cause. The board of directors may at any time
terminate or modify the authority of any agent. No officer resigning and (except
where a right to receive compensation shall be expressly provided in a duly
authorized written agreement with the corporation) no officer removed shall have
any right to any compensation as such officer for any period following his or
her resignation or removal, or any right to damages on account of such removal,
whether his or her compensation be by the month or by the year or otherwise;
unless in the case of a resignation, the directors, or in the case of removal,
the body acting on the removal, shall in their or its discretion provide for
compensation.
6.12 VACANCIES. If the office of the chairman, chief executive officer,
president, treasurer or secretary becomes vacant, the board of directors may
elect a successor by vote of a majority of the directors then in office. If the
office of any other officer becomes vacant, any person or body empowered to
elect or appoint that office may choose a successor. Each such successor shall
hold office for the unexpired term of his or her predecessor, and in the case of
the chairman, chief executive officer, president, treasurer and secretary until
his or her successor is chosen and qualified, or in each case until he or she
sooner dies, resigns, is removed or becomes disqualified.
Section 7. CAPITAL STOCK
7.1 STOCK CERTIFICATES. Each stockholder shall be entitled to a
certificate stating the number and the class and the designation of the series,
if any, of the shares held by him or her, in such form as shall, in conformity
to law, the certificate of incorporation and the bylaws, be prescribed from time
to time by the board of directors. Such certificate shall be signed by (i) the
chairman of the board of directors, president or a vice president, and (ii) the
treasurer or an assistant treasurer or the secretary or an assistant secretary.
Any of or all the signatures on the certificate may be a facsimile. In case an
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed on such certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the corporation with the same effect as if he or she were such officer,
transfer agent, or registrar at the time of its issue.
7.2 LOST CERTIFICATES. The board of directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a
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new certificate or certificates, the board of directors may, in its discretion
and as a condition precedent to the issuance thereof, require the owner of such
lost, stolen or destroyed certificate or certificates, or his or her legal
representative, to advertise the same in such manner as it shall require and/or
to give the corporation a bond in such sum as it may direct as indemnity against
any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
Section 8. TRANSFER OF SHARES OF STOCK
8.1 TRANSFER ON BOOKS. Subject to any restrictions with respect to the
transfer of shares of stock, shares of stock may be transferred on the books of
the corporation by the surrender to the corporation or its transfer agent of the
certificate therefor properly endorsed or accompanied by a written assignment
and power of attorney properly executed, with necessary transfer stamps affixed,
and with such proof of the authenticity of signature as the board of directors
or the transfer agent of the corporation may reasonably require. Except as may
be otherwise required by law, by the certificate of incorporation or by these
bylaws, the corporation shall be entitled to treat the record holder of stock as
shown on its books as the owner of such stock for all purposes, including the
payment of dividends and the right to receive notice and to vote or to give any
consent with respect thereto and to be held liable for such calls and
assessments, if any, as may lawfully be made thereon, regardless of any
transfer, pledge or other disposition of such stock until the shares have been
properly transferred on the books of the corporation.
It shall be the duty of each stockholder to notify the corporation of
his or her post office address.
Section 9. GENERAL PROVISIONS
9.1 RECORD DATE. In order that the corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the board of directors may fix, in advance, a record date,
which shall not be more than sixty days nor less than ten days before the date
of such meeting, nor more than sixty days prior to any other action to which
such record date relates. A determination of stockholders of record entitled to
notice of or to vote at a meeting of stockholders shall apply to any adjournment
of the meeting; provided, however, that the board of directors may fix a new
record date for the adjourned meeting. If no record date is fixed by the board
of directors,
(a) The record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held; and
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(b) The record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the board of directors
adopts the resolution relating to such purpose.
9.2 DIVIDENDS. Dividends upon the capital stock of the corporation may
be declared by the board of directors at any regular or special meeting or by
written consent, pursuant to law. Dividends may be paid in cash, in property, or
in shares of the capital stock, subject to the provisions of the certificate of
incorporation.
9.3 PAYMENT OF DIVIDENDS. Before payment of any dividend, there may be
set aside out of any funds of the corporation available for dividends such sum
or sums as the directors from time to time, in their absolute discretion, think
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the corporation, or
for such other purpose as the directors shall think conducive to the interest of
the corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
9.4 CHECKS. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers or such other person or
persons as the board of directors may from time to time designate.
9.5 FISCAL YEAR. The fiscal year of the corporation shall begin on the
first day of January in each year and shall end on the last day of December next
following, unless otherwise determined by the board of directors.
9.6 SEAL. The board of directors may, by resolution, adopt a corporate
seal. The corporate seal shall have inscribed thereon the name of the
corporation, the year of its organization and the word "Delaware." The seal may
be used by causing it or a facsimile thereof to be impressed or affixed or
reproduced or otherwise. The seal may be altered from time to time by the board
of directors.
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
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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 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
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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 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.
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Section 11. AMENDMENTS
11.1 BY THE BOARD OF DIRECTORS. These bylaws may be altered, amended or
repealed or new bylaws may be adopted by the affirmative vote of a majority of
the directors present at any regular or special meeting of the board of
directors at which a quorum is present.
11.2 BY THE STOCKHOLDERS. Notwithstanding any other provision of these
bylaws, and notwithstanding the fact that a lesser percentage may be specified
by law, these bylaws may be altered, amended or repealed or new bylaws may be
adopted by the affirmative vote of the holders of at least seventy-five percent
(75%) of the shares of the capital stock of the corporation issued and
outstanding and entitled to vote at any regular or special meeting of
stockholders, provided notice of such alteration, amendment, repeal or adoption
of new bylaws shall have been stated in the notice of such regular or special
meeting.
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Exhibit 4.1
COMMON STOCK COMMON STOCK
[HEALTHGATE LOGO]
HealthGate DATA CORP.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP 42222h 10 6
THIS CERTIFIES THAT
is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF
ONE CENT ($0.1) EACH OF THE COMMON STOCK OF
HealthGate Data Corp., transferable on the books of the Corporation by the
holder hereof in person or by duly authorized attorney upon surrender of this
certificate properly endorsed. This certificate and the shares represented
hereby are issued and shall be held subject to the laws of the State of
Delaware and the Certificate of Incorporation and the By-Laws of the
Corporation, as the same may be from time to time amended, to all of which
the holder by acceptance hereof assents. This certificate is not valid unless
countersigned by the Transfer Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
/s/Mary B. Miller /s/ William S. Reece
----------------- [SEAL] -------------------------------------
TREASURER PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
THE CORPORATION IS AUTHORIZED TO ISSUE MORE THAN ONE CLASS OF STOCK. THE
CORPORATION WILL FURNISH TO THE HOLDER UPON REQUEST AND WITHOUT CHARGE THE
POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR
OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND THE
QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in
full according to applicable laws or regulations;
<TABLE>
<CAPTION>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT- Custodian
TEN ENT - as tenants by the entireties ---------- -----------
JT TEN - as joint tenants with right of (Cust) (Minor)
survivorship and not as tenants under Uniform Gifts to Minors
in common Act
-------------------
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received, hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Shares of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ------------------------------------------------------------------------------
Attorney to transfer the said shares on the books of the within named
Corporation with full power of substitution in the premises.
Dated
-----------------------------------
--------------------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER
Signature(s) Guaranteed:
- --------------------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 5.1
[FORM OF OPINION]
, 1999
HealthGate Data Corp.
25 Corporate Drive
Burlington, MA 01803
Gentlemen and Ladies:
We have acted as counsel to HealthGate Data Corp., a Delaware
corporation (the "Company"), in connection with (a) the preparation of the
Company's Registration Statement on Form S-1, File No. 333-76899 (the
"Registration Statement"), initially filed on April 23, 1999 with the Securities
and Exchange Commission under the Securities Act of 1933, for the registration
of an aggregate of 5,290,000 shares of the Company's common stock, par value
$.01 per share (the "Shares"), and (b) the Underwriting Agreement (the
"Agreement"), to be entered into between the Company and SG Cowen Securities
Corporation, Banc of America Securities LLC and Volpe Brown Whelan & Company,
LLC, as Representatives of the Underwriters, the form of which is attached as
Exhibit 1.1 to the Registration Statement.
Of the 5,290,000 Shares included in the Registration Statement,
4,600,000 Shares (the "Firm Shares") will be issued and sold by the Company to
the several Underwriters to be named in Schedule A to the Agreement (the
"Underwriters"); and, solely for the purpose of covering over-allotments, the
Company proposes to sell to the Underwriters up to an additional 690,000 shares
(the "Additional Shares").
We have examined the originals, or certified, conformed or reproduction
copies, of all such records, agreements, instruments and documents as we have
deemed relevant or necessary as the basis for the opinions hereinafter
expressed. In all such examinations, we have assumed the genuineness of all
signatures on original or certified copies and the conformity to original or
certified copies of all copies submitted to us as conformed or reproduction
copies. As to various questions of fact relevant to our opinion, we have relied
upon statements or certificates of public officials, officers or representatives
of the Company and others.
Based upon the foregoing, we are of the opinion that the Firm Shares
and the Additional Shares to be sold by the Company to the Underwriters, when
issued, delivered and paid for in accordance with the terms of the Agreement,
will be validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus forming a part of the Registration Statement.
Very truly yours,
Rich, May, Bilodeau & Flaherty, P.C.
<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 June 11, 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.
/s/ PRICEWATERHOUSECOOPERS LLP
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
June 11, 1999
