HEALTHGATE DATA CORP, 10-Q, 2000-05-12

HEALTHGATE DATA CORP
10-Q, 2000-05-12
BUSINESS SERVICES, NEC

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<PAGE> 1

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000

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

COMMISSION FILE NUMBER 0-28701

HEALTHGATE DATA CORP.
(Exact name of registrant as specified in its charter)

<TABLE>
<CAPTION>
<S> <C>
DELAWARE 04-3220927
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>

25 CORPORATE DRIVE, SUITE 310, BURLINGTON, MASSACHUSETTS 01803
(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (781) 685-4000

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days.

Yes _X_ No ___

The number of shares outstanding of the registrant's common stock as of
April 30, 2000 was 17,835,263.

<PAGE> 2

HEALTHGATE DATA CORP.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000

INDEX

<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
----

<S> <C>
Item 1. Financial Statements

Condensed Consolidated Balance Sheet at March 31, 2000
(unaudited) and December 31, 1999 ...................................................... 3

Condensed Consolidated Statement of Operations for the three months
ended March 31, 2000 and 1999 (unaudited)............................................... 4

Condensed Consolidated Statement of Cash Flows for the three months
ended March 31, 2000 and 1999 (unaudited) .............................................. 5

Notes to Condensed Consolidated Financial Statements.................................... 6

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................................. 10

Item 3. Quantitative and Qualitative Disclosures about Market Risk.............................. 22

PART II. OTHER INFORMATION

Item 1. Legal Proceedings....................................................................... 22
Item 2. Changes in Securities and Use of Proceeds............................................... 23
Item 3. Defaults Upon Senior Securities ........................................................ N/A
Item 4. Submission of Matters to a Vote of Security Holders .................................... N/A
Item 5. Other Information ...................................................................... N/A
Item 6. Exhibits and Reports on Form 8-K........................................................ 24

Signatures ........................................................................................ 25
</TABLE>

2
<PAGE> 3

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

HEALTHGATE DATA CORP.
CONDENSED CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 833,526 $ 578,560
Marketable securities 28,297,236 --
Accounts receivable, including receivables
from related parties of $17,650 and $49,125 at March 31, 2000
and December 31, 1999, respectively, and net of allowance for
doubtful accounts of $69,145 and $50,000 at March 31, 2000
and December 31, 1999, respectively 1,208,190 705,578
Unbilled accounts receivable 12,394 35,825
Prepaid advertising 12,974,058 4,500,000
Prepaid expenses and other current assets 1,084,839 318,514
------------ ------------
Total current assets 44,410,243 6,138,477
Long-term investments 3,487,219 --
Fixed assets, net 1,490,648 1,302,368
Marketing and distribution rights, net 14,383,000 17,535,000
Deferred offering costs -- 2,055,491
Other assets 485,586 131,586
------------ ------------
Total assets $ 64,256,696 $ 27,162,922
============ ============

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY

Current Liabilities:
Current portion of capital lease obligation $ 450,101 $ 442,668
Accounts payable 1,574,234 3,060,189
Customer deposits 285,408 558,066
Accrued payroll and other expenses 2,707,143 2,050,070
Deferred revenue 5,293,246 1,667,565
------------ ------------
Total current liabilities 10,310,132 7,778,558
Long-term portion of capital lease obligation 401,479 439,743
Long-term note payable -- 1,517,295
------------ ------------
Total liabilities 10,711,611 9,735,596
------------ ------------
Redeemable convertible preferred stock -- 15,626,726
------------ ------------
Common stock and other stockholders' equity:
Common stock, $.01 par value;
Authorized: 100,000,000 shares
Issued and outstanding: 17,834,602 and 5,219,251 shares
at March 31, 2000 and December 31, 1999, respectively 178,346 52,192
Additional paid-in capital 99,531,613 38,681,954
Accumulated deficit (45,392,366) (35,930,662)
Deferred compensation (772,508) (1,002,884)
------------ ------------
Total common stock and other stockholders' equity 53,545,085 1,800,600
------------ ------------
Commitments and contingencies (Note 6)
Total liabilities, redeemable convertible
preferred stock and common stock and other
stockholders' equity $ 64,256,696 $ 27,162,922
============ ============
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.

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<PAGE> 4

HEALTHGATE DATA CORP.

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
------------ ------------
<S> <C> <C>
Revenue, including revenue from related parties of
$198,700 and $218,151 in 2000 and 1999, respectively $ 2,533,266 $ 532,805
Costs and expenses:
Cost of revenue 1,103,520 362,844
Research and development (excluding stock based
compensation of $13,906 and $69,114 in 2000 and in 1999, respectively) 1,601,664 752,460
Sales and marketing (excluding stock based
compensation of $26,609 and $24,753 in 2000 and in 1999, respectively) 3,640,716 552,416
General and administrative (excluding stock based
compensation of $67,441 and $29,092 in 2000 and in 1999, respectively) 761,412 286,273
Marketing and distribution rights amortization 4,395,000 --
Stock based compensation 107,956 122,959
------------ ------------
Total costs and expenses 11,610,268 2,076,952
------------ ------------

Loss from operations (9,077,002) (1,544,147)

Unamortized debt discount write off (475,821) --
Interest and other income (expense), net 197,306 (158,046)
------------ ------------
Net loss (9,355,517) (1,702,193)
Preferred stock dividends and accretion of preferred stock
to redemption value (106,186) (148,707)
------------ ------------
Net loss attributable to common stockholders $ (9,461,703) $ (1,850,900)
============ ============
Basic and diluted net loss per share attributable to
common stockholders $ (0.71) $ (0.41)
Shares used in computing basic and diluted net loss per
share attributable to common stockholders 13,379,066 4,548,553

Unaudited proforma basic and diluted net loss per share $ (0.59) $ (0.18)
Shares used in computing unaudited proforma basic and diluted
net loss per share 15,944,421 9,220,753
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

4
<PAGE> 5

HEALTHGATE DATA CORP.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (9,355,517) $ (1,702,193)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 5,077,252 129,193
Stock based compensation 107,956 122,959
Unamortized debt discount write off 475,821 --
Revenue associated with equity instruments (451,658) --
Other (net) 25,961 --
Changes in assets and liabilities:
Accounts receivable (521,758) (253,448)
Unbilled accounts receivable 23,431 (6,041)
Prepaid advertising (8,974,058) --
Prepaid expenses and other current assets (766,325) (92,493)
Deferred offering costs 2,055,491 --
Other assets (354,000) (128,538)
Accounts payable (1,485,955) 617,363
Customer deposits (272,658) --
Accrued payroll and other expenses 657,073 139,840
Deferred revenue 590,120 575,346
------------ ------------
Net cash used in operating activities (13,168,824) (598,012)
------------ ------------

Cash flows from investing activities:
Purchases of marketable securities (28,574,283) --
Proceeds from sales and maturities of marketable securities 277,047 --
Purchases of fixed assets (272,717) (197,358)
------------ ------------
Net cash used in investing activities (28,569,953) (197,358)
------------ ------------

Cash flows from financing activities:
Payments of capital lease obligations (118,503) (63,792)
Payment of long-term note payable (2,000,000) --
Payment of Series E preferred stock dividends (465,358) --
Proceeds from issuance of preferred and common stock,
net of issuance costs 44,577,604 55
------------ ------------
Net cash provided by (used in) financing activities 41,993,743 (63,737)
------------ ------------

Net increase (decrease) in cash and cash equivalents 254,966 (859,107)
Cash and cash equivalents, beginning of period 578,560 960,831
------------ ------------
Cash and cash equivalents, end of period $ 833,526 $ 101,724
============ ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 59,000 $ 136,000
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

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<PAGE> 6

SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES

HealthGate entered into capital leases for certain computer equipment
totaling approximately $88,000 and $135,000 during the three months ended March
31, 2000 and 1999, respectively.

On January 1, 2000, the exercise price of a warrant issued to General
Electric Company was adjusted from $9.49 to $3.46 per share pursuant to the
terms of the warrant. As a result, the fair value of the warrant increased by
$1,243,000, which was recorded as marketing and distribution rights.

HEALTHGATE DATA CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

HealthGate Data Corp. ("HealthGate") is an Internet provider of e-Health
solutions to hospitals, institutions, businesses, publishers and individuals
featuring reliable, objective, comprehensive and up-to-date healthcare content
and technology. HealthGate's business-to-business solutions 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.

The accompanying unaudited condensed consolidated interim financial
statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements, and
should be read in conjunction with the audited financial statements included in
HealthGate's Form 10-K for the year ended December 31, 1999. However, in the
opinion of management, the accompanying interim 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 results of the interim periods presented. The operating
results for the interim periods presented are not necessarily indicative of the
results expected for the full fiscal years or any future period. Certain amounts
in the prior period condensed consolidated financial statements have been
reclassified to conform to the current period presentation.

2. INITIAL PUBLIC OFFERING AND USE OF PROCEEDS

In January 2000, HealthGate completed an initial public offering of its
common stock and a concurrent private placement, both at $11.00 per share.
HealthGate sold 3,750,000 shares of common stock in the initial public offering,
and 795,454 shares of common stock in the private placement, for aggregate net
proceeds of approximately $44.5 million (after deducting the underwriting
commissions and the offering expenses). In connection with the initial public
offering, all outstanding shares of redeemable convertible preferred stock
converted into 7,530,556 shares of common stock.

In February 2000, HealthGate repaid a $2,000,000 long-term note payable
with a portion of the net offering proceeds, and wrote off the remaining
unamortized debt discount of approximately $476,000. Following conversion of the
outstanding preferred stock, HealthGate paid cash for accrued dividends on
Series E preferred stock totaling $465,000. In addition, HealthGate used a
portion of the net offering proceeds to pay first year fees of $10.3 million
under its agreement with Snap (Note 6).

3. ACTUAL AND UNAUDITED PROFORMA NET LOSS PER SHARE

Net loss per share is computed in accordance with Statement of Financial
Accounting Standards (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

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<PAGE> 7

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 proforma 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.

4. REVENUE RECOGNITION

HealthGate derives revenue primarily from (1) Web site development and
hosting arrangements, including CHOICE Web sites and activePress services, (2)
content syndication arrangements, (3) advertising and sponsorships, and (4) user
subscription and transaction based fees. Revenue from Web site development and
hosting arrangements and content syndication arrangements is recognized ratably
over the terms of the underlying agreement between HealthGate, the customer, and
if applicable, HealthGate's authorized reseller, which generally ranges from one
to three years. For any arrangement in which HealthGate guarantees advertising
commissions to the customer, HealthGate records fees paid by the customer as a
customer deposit, up to the amount of the applicable guarantee. Payments made to
customers under these guarantees are recorded as reductions of the related
customer deposit. The excess of the fee paid by the customer to HealthGate over
guaranteed advertising and sponsorship commissions, if any, is recognized as
revenue ratably over the term of the underlying agreement. For those
arrangements in which HealthGate guarantees advertising and sponsorship
commissions in excess of the fees paid by the customer, the excess is recorded
as expense upon signing the agreement. For arrangements in which HealthGate
sells through a reseller, HealthGate does not recognize any revenue until an
agreement has been finalized between HealthGate, its customer, and its
authorized reseller, and the Web site has been delivered. Revenue is not
recognized in any circumstances unless collectability is deemed probable.

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 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 month to three years. Revenue from
user subscriptions is recognized ratably over the subscription period, and
revenue from transaction-based fees is recognized when the service is provided.

For multi-element service arrangements, each element is accounted for
separately over its respective service period, provided that there is objective
evidence of fair value. If the fair value of each element cannot be objectively
determined, the total value of the arrangement is recognized ratably over the
entire service period. However, for arrangements with multiple service periods
with escalating fees, fees for each service period are recognized ratably over
that period. For arrangements under which HealthGate receives equity instruments
in exchange for services, HealthGate determines the value of the arrangement
based on the fair value of the equity received or the services provided,
whichever is more readily determinable.

5. LONG-TERM INVESTMENTS

In connection with an e-commerce/sponsorship agreement, HealthGate received
996,348 shares of Series H preferred stock in Medical Self Care, Inc.
(SelfCare), a privately held provider of health related products and services.
These shares had a value of approximately $3,487,000 when received, and resulted
in an

7
<PAGE> 8

ownership percentage of approximately 5%. HealthGate has recorded these shares
at cost, subject to periodic reviews for impairment.

6. COMMITMENTS AND CONTINGENCIES

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 March 31, 2000 totaled approximately $2,844,000, which
includes $604,000 for a content development and distribution agreement with the
New England Journal of Medicine.

In July 1999, HealthGate received a letter alleging that HealthGate's Web
site induces users to infringe a patent held by a company (the "Holder"). In
lieu of pursuing a patent infringement claim against HealthGate, the Holder
offered to provide HealthGate with a license for unlimited use of the patent for
a one-time payment of between $50,000 and $150,000. HealthGate is currently
investigating this matter. At this time, HealthGate is unable to predict its
outcome.

In October 1999, HealthGate entered into a three-year strategic alliance
agreement with Snap! LLC and Xoom.com, Inc. Under this agreement, Snap will
provide various services to promote HealthGate's name, its www.healthgate.com
Web site, its co-branded CHOICE Web sites and the products and services
HealthGate offers. In exchange for the services provided to HealthGate by Snap,
in November 1999 HealthGate issued 500,000 shares of its common stock to Snap,
and in February 2000 HealthGate paid Snap the minimum first year cash fees of
$10.0 million plus a $250,000 production and content integration fee. HealthGate
has also agreed to pay Snap a minimum $15.0 million in each of the following two
years. HealthGate has also agreed to pay Snap up to an additional $5.0 million
in the first year, $10.0 million in the second year, and $15.0 million in the
third year of the agreement if Snap delivers more than a minimum number of
click-throughs to the co-branded Snap/HealthGate Web site in the respective
years. Either Snap or HealthGate may terminate this agreement if the other party
commits a material breach. If Snap terminates the agreement based on material
breach by HealthGate, including non-payment, insolvency, or failure to deliver
or timely update content, HealthGate has agreed to continue to pay Snap 55% of
all fees payable under the remaining term of the agreement. During the quarter
ended March 31, 2000, HealthGate recognized expense of $1,776,000 related to
this agreement, which includes $500,000 of non-cash charges related to the
shares issued.

Snap and Xoom.com are both wholly-owned by NBC Internet, Inc., which is
owned partially by National Broadcasting Company, a subsidiary of General
Electric Company. General Electric Company is a principal stockholder of
HealthGate.

7. RELATED PARTY TRANSACTIONS

On January 1, 2000, the exercise price of a warrant issued to General
Electric Company for the purchase of 1,189,800 shares of HealthGate common stock
was adjusted from $9.49 to $3.46 per share. As a result of the exercise price
adjustment, the fair value of the warrant increased by $1,243,000. This increase
was calculated using the Black-Scholes option pricing model, based on an assumed
common stock fair value per share of $9.00, 100% volatility, a term of 4.5 years
and an interest rate of 5.94%. This incremental value was recorded as marketing
and distribution rights, and will be amortized over the remaining term of the
related development and distribution agreement. During the three months ended
March 31, 2000, HealthGate recorded non-cash amortization expense of $3,270,000
related to this warrant.

8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS

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<PAGE> 9

No. 133). 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, 2000. HealthGate does not expect SFAS No. 133 to have a
material effect on its financial position or results of operations.

In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" (FIN 44). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. HealthGate
does not expect the application of FIN 44 to have a material impact on its
financial position or results of operations.

In March 2000, the Emerging Issues Task Force reached a final consensus on
Issue No. 00-02, "Accounting for Web Site Development Costs" (EITF 00-02), which
addresses how an entity should account for costs incurred to develop a web site.
In their final consensus, the Task Force concluded that the costs incurred
during the planning stage should be expensed; the costs incurred for activities
during the web application and infrastructure development stage should be
capitalized; and generally the costs incurred during the operation stage should
be expensed. With respect to graphics costs, the Task Force concluded the costs
incurred to create the initial graphics for the web site would be capitalized
and that any subsequent updates would be expensed as incurred, unless the
updates added additional functionality. EITF 00-02 is effective for Web site
development costs incurred for fiscal quarters beginning after June 30, 2000
(including costs incurred for projects in process as of the beginning of the
quarter). HealthGate is currently assessing the impact of EITF 00-02 on its
financial condition and results of operations.

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<PAGE> 10

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This report on Form 10-Q contains certain statements that are
forward-looking and actual results may differ materially from those contemplated
by the forward-looking statements. These forward looking statements reflect
management's current expectations, are based on many assumptions and are subject
to certain risks and uncertainties. Factors that might cause or contribute to
such differences are described further below and in the periodic reports and
registration statements we file from time to time with the Securities and
Exchange Commission, including HealthGate's most recent Form 10-K and most
recent registration statement on Form S-1. You are cautioned not to place undue
reliance on the forward-looking statements, which appear elsewhere in this
report on Form 10-Q. We do not intend to update or publicly release any
revisions to the forward-looking statements.

OVERVIEW

HealthGate is an Internet provider of e-Health solutions to hospitals,
institutions, businesses, publishers, and individuals featuring reliable,
objective, comprehensive and up-to-date healthcare information content. Our
solutions help physicians and other healthcare professionals, patients and
health-conscious consumers make better-informed healthcare decisions.

We distribute our content through a network of proprietary and affiliated
Web sites that comprise the HealthGate Network. The HealthGate Network includes
(1) customized, co-branded CHOICE Web sites for institutions, principally
hospitals and businesses, which carry both HealthGate's and an enterprise
client's name, are designed as a seamless component of an enterprise client's
Web site and, for certain institutions and businesses, complement the healthcare
information, products and services they already offer or sell through their own
Web sites; (2) our own Web sites, www.healthgate.com in the United States and
www.healthgate.co.uk in the United Kingdom; and (3) other third party co-branded
Web sites to which we provide our proprietary and licensed content. We
commercially introduced our CHOICE Web site product in early 1999 and as of
March 31, 2000 had delivered 140 CHOICE Web sites to hospitals and other
enterprise clients, which includes 75 CHOICE Web sites delivered to Columbia/
HCA hospitals.

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 approximately $45.4
million as of March 31, 2000. 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 for the foreseeable future, and we
cannot 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.

NON-CASH EXPENSES

We recorded deferred compensation of $2,307,000 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 grants. The difference is recorded as a reduction of stockholders'
equity and is being amortized over the vesting period of the applicable options,
typically

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three years. Of the total deferred compensation amount, $108,000 and $123,000
was amortized during the quarters ended March 31, 2000 and 1999, respectively,
which was recorded as stock based compensation. We currently expect to amortize
the remaining amounts of deferred compensation at March 31, 2000 as follows:

<TABLE>
<CAPTION>
<S> <C>
April 1, 2000 - December 31, 2000........................ $309,000
January 1, 2001 - December 31, 2001...................... $412,000
January 1, 2002 - June 30, 2002.......................... $ 52,000
</TABLE>

On January 1, 2000, the exercise price of a warrant issued to General
Electric Company was adjusted from $9.49 to $3.46 per share, pursuant to the
terms of the warrant. As a result of this exercise price adjustment, the fair
value of the warrant increased by $1,243,000. This incremental value was
recorded as marketing and distribution rights, and will be amortized over the
remaining term of the related development and distribution agreement. During the
three months ended March 31, 2000, we recorded amortization expense of
$3,270,000 related to this warrant.

During the three months ended March 31, 2000, we also recorded amortization
expense of $1,125,000 related to a warrant for the purchase of 1,941,035 shares
of our common stock, which was issued to Columbia Information Systems Inc. (a
subsidiary of Columbia/HCA Healthcare Corporation) in 1999 in connection with a
marketing and reseller agreement.

In November 1999 we issued 500,000 shares of our common stock to Snap as
partial payment for first year fees under a three-year strategic alliance
agreement with Snap! LLC and Xoom.com, Inc. The value of these shares was $4.5
million at the time of issuance, which was recorded as prepaid advertising. The
value of these shares will be amortized as a sales and marketing expense on a
straight-line basis over the first year of the related agreement. In exchange
for the services provided to us by Snap, in November 1999 we issued 500,000
shares of its common stock to Snap, and in February 2000 we paid Snap the
minimum first year fees of $10.0 million plus a $250,000 production and content
integration fee. We have agreed to pay Snap minimum fees of $15,000,000 in cash
in each of the second and third years of the agreement for services provided to
us by Snap in those years. We have also agreed to pay Snap up to an additional
$5,000,000 in the first year, $10,000,000 in the second year, and $15,000,000 in
the third year of the agreement if Snap delivers more than certain minimum
click-throughs to the co-branded Snap/HealthGate Web site in the respective
years. Either Snap or we may terminate this agreement if the other party commits
a material breach. If Snap terminates the agreement based on material breach by
us, including, non-payment, insolvency, or failure to deliver or timely update
content, we have agreed to continue to pay Snap 55% of all fees payable by us
under the remaining term of the agreement. During the three months ended March
31, 2000, we recorded expense totaling $1,776,000 related to this agreement,
which includes $500,000 of non-cash amortization charges related to the stock
issued.

RESULTS OF OPERATIONS

In 1999 and the three months ended March 31, 2000, 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.

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COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2000 WITH THE THREE MONTHS ENDED
MARCH 31, 1999

Revenue

Total revenue was $2,533,000 for the three months ended March 31, 2000
compared to $533,000 for the three months ended March 31, 1999, an increase of
$2,000,000 or 375%. Services revenue for the three months ended March 31, 2000
increased to $1,582,000 from $387,000 for the three months ended March 31, 1999,
due primarily to an increase in the revenue derived from CHOICE Web site
development, implementation and hosting, including revenue of $875,000 in 2000
related to our arrangement with Columbia Information Systems. Advertising,
sponsorship and e-commerce revenue increased to $951,000 in three months ended
March 31, 2000 from $146,000 in the three months ended March 31, 1999. This
increase was due primarily to sponsorship revenue of $628,000 in 2000, which
includes $581,000 related to our arrangement with Self Care. This increase was
also due to an increase in advertising revenue to $273,000 in three months ended
March 31, 2000 from $43,000 in the three months ended March 31, 1999. In the
three months ended March 31, 2000, three customers represented 66% of total
revenue, Columbia Information Systems (35%), SelfCare (23%), and Blackwell
Science (8%). In the three months ended March 31, 1999, three customers
represented 60% of total revenue, Blackwell Science (36%), Data General (13%),
and WebMD (11%).

Costs and Expenses

Cost of Revenue. Cost of revenue consists primarily of costs involved with
providing our Web services, royalties associated with licensed content, and
related equipment and software costs. Cost of revenue increased to $1,104,000 in
the three months ended March 31, 2000 from $363,000 in the three months ended
March 31, 1999, due primarily to higher royalty expenses for licensed content
and depreciation on new equipment purchases. 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 and
new equipment.

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 to $1,602,000 in the three months ended March 31, 2000 from $752,000
in the three months ended March 31, 1999, due primarily to salaries and related
costs from the addition of technical and development personnel and consultants.
We expect that research and development expenses will continue to increase in
absolute dollars for the foreseeable future as we hire additional personnel and
increase expenditures to support our Web-based service offerings.

Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions, and related costs for sales and marketing personnel, as
well as the cost of advertising, marketing and promotional activities. Sales and
marketing expenses increased to $3,641,000 in the three months ended March 31,
2000 from $552,000 in the three months ended March 31, 1999. This increase was
primarily due to expenses associated with the Snap agreement of $1,776,000 in
2000, which includes $500,000 of non-cash amortization charges associated with
the shares of our common stock issued to Snap. This increase was also due to
higher 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.

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General and Administrative. General and administrative expense consists
primarily of salaries and related costs for executive and administrative
personnel, as well as legal, accounting and insurance costs. General and
administrative expenses increased to $761,000 in the three months ended March
31, 2000 from $286,000 in the three months ended March 31, 1999. This increase
was due primarily to salaries and related costs for newly hired administrative
personnel, higher salaries and related costs for existing personnel, increased
professional service fees, and costs associated with being a public company. We
expect that we will incur increased general and administrative expenses as we
continue to hire additional personnel and incur incremental costs related to the
growth of the business, including additional costs associated with public
company obligations.

Marketing and Distribution Rights Amortization. During the three months
ended March 31, 2000, non-cash amortization expense of $4,395,000 was recorded
in connection with the warrants issued to General Electric Company and Columbia
Information Systems in 1999. These warrants were not outstanding in the first
quarter of 1999.

Stock Based Compensation. During the three months ended March 31, 2000 and
1999, we recorded stock based compensation expense totaling $108,000 and
$123,000, respectively. The remaining deferred compensation balance at March 31,
2000 is being amortized over the vesting period of the individual options. See
further discussion under "Non-Cash Expenses," above.

Unamortized Debt Discount Write Off

In February 2000, HealthGate repaid its $2,000,000 long-term note payable,
and wrote off the remaining unamortized debt discount of approximately $476,000.

Interest and Other Income (Expense), Net

Interest and other income (expense), net includes interest income of
$265,000 and $4,000 and interest expense of $68,000 and $162,000 for the three
months ended March 31, 2000 and 1999, respectively. The increase in interest
income was primarily due to interest earned on investments made with the net
proceeds from our January 2000 initial public offering and concurrent private
placement. The decrease in interest expense was due primarily to the repayment
in February 2000 and the conversion in April 1999 of a note payable with a
related party. Interest expense for the three months ended March 31, 1999 also
included debt discount and issuance cost amortization totaling $24,000 related
to the long-term note payable.

Income Taxes

HealthGate has incurred significant losses for all periods from inception
through March 31, 2000. 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.

LIQUIDITY AND CAPITAL RESOURCES

Since inception and prior to our January 2000 initial public offering and
concurrent private sale, we have financed our operations primarily by the
private placement of debt and equity securities. In January 2000, we completed
the initial public offering of our common stock and a concurrent private
placement and realized net proceeds of approximately $44.5 million. In January
2000 in connection with our initial public offering, the Series E preferred
stock was converted into 2,858,522 shares of common stock. A portion of our net
proceeds was used to repay a $2,000,000 long-term note payable, which was
secured by substantially all of our tangible and intangible assets. In addition,
following conversion of the outstanding preferred stock, HealthGate paid cash
for accrued dividends on Series E preferred stock totaling $465,000. We have
generally financed computer and related hardware needs through equipment lease
financing arrangements. We

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entered into capital leases for computer equipment totaling $88,000 and $135,000
during the three months ended March 31, 2000 and 1999, respectively. As of March
31, 2000, we had approximately $834,000 of cash and cash equivalents and
$28,297,000 in marketable securities.

For the three months ended March 31, 2000, the cash used in operations was
$13,169,000. Cash used during this period was primarily due to the net loss of
$9,356,000, offset partially by depreciation and amortization of $5,077,000,
non-cash stock-based compensation expense of $108,000, revenue associated with
equity instruments of $452,000, write off of unamortized debt discount of
$476,000 related to the repayment of a long-term note payable, an increase of
$522,000 in accounts receivable, a decrease of $23,000 in unbilled accounts
receivable, an increase of $8,974,000 in prepaid advertising, an increase of
$766,000 in prepaid expenses and other current assets, a decrease of $2,055,000
in deferred offering costs related to our initial public offering, an increase
of $354,000 in other assets, a decrease of $1,486,000 in accounts payable, a
decrease of $273,000 in customer deposits for CHOICE Web sites, an increase of
$657,000 in accrued payroll and accrued expenses and an increase of $590,000 in
deferred revenue.

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
$1,702,193, offset partially by depreciation and amortization of $129,000,
non-cash stock based 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 in other assets of $129,000, an increase of $617,000
in accounts payable, an increase of $140,000 in accrued payroll and other
expenses and an increase of $575,000 in deferred revenue. Increases in operating
assets and liabilities were primarily due to the growth of business and
operations during the first quarters of 2000 and 1999.

Cash used for investing activities consisted primarily of marketable
securities purchases of $28,574,000 in the three months ended March 31, 2000,
proceeds from sales and maturities of marketable securities of $277,000 in the
three months ended March 31, 2000 and property and equipment purchases of
$273,000 and $197,000 in the three months ended March 31, 2000 and 1999,
respectively. During three months ended March 31, 2000 and 1999, we also entered
into capital leases for computer equipment totaling $88,000 and $135,000,
respectively.

At March 31, 2000, we had outstanding commitments under capital leases of
$1,036,000 and under operating leases for equipment and office space of
$4,847,000. In addition, future minimum payments under content license
agreements totaled $2,844,000 at March 31, 2000. We expect our commitments under
content licensing to increase as we expand our content libraries.

In October 1999, we entered into a three-year strategic alliance agreement
with Snap LLC and Xoom.com Inc. In connection with this agreement, in November
1999 we issued 500,000 shares of our common stock to Snap, and in February 2000
we paid cash of $10.3 million related to the first year fees due under the
arrangement. We have agreed to pay Snap minimum fees of $15.0 million in each of
the second and third years of the agreement for the services provided to us by
Snap in those years. We have also agreed to pay Snap up to an additional $5.0
million in the first year, $10.0 million in the second year and $15.0 million in
the third year of the agreement if Snap delivers more than certain minimum
click-throughs to the co-branded Snap/HealthGate Web site in the respective
years. See further discussion under "Non-Cash Expenses," above.

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Our future liquidity and capital requirements will depend upon numerous
factors, including the success of our existing and new application and service
offerings and competing technological and market developments. We currently
anticipate that the net proceeds from our initial public offering and concurrent
private placement, together with our other available cash resources, will be
sufficient to meet our presently anticipated working capital, capital
expenditure and business expansion requirements for at least the next 12 months.
However, we may need to raise additional funds to support expansion, develop new
or enhanced applications and services, respond to competitive pressures, acquire
complementary businesses or technologies or take advantage of unanticipated
opportunities. We may be required to raise additional funds through public or
private financing, strategic relationships or other arrangements. There can be
no assurance that additional funding, if needed, will be available on terms
acceptable to us, or at all.

YEAR 2000 COMPLIANCE READINESS DISCLOSURE

In late 1999, we completed our planning and testing of systems to become
Year 2000 ready. We have not experienced any significant disruptions in critical
information technology and non-information technology systems or any significant
Year 2000 related problems. To date, we have not incurred any material costs in
identifying or evaluating Year 2000 compliance issues, planning or testing. We
presently do not anticipate that future expenditures will be material. We are
not aware of any material problems resulting from Year 2000 issues, either with
our products, our internal systems, or the products and services of third
parties. We will continue to monitor our products and systems and those of our
suppliers and vendors throughout the Year 2000 for any latent Year 2000 matters
that may arise.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133).
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, 2000. We do not expect SFAS No. 133 to have a material effect on
our financial position or results of operations.

In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" (FIN 44). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. We do not
expect the application of FIN 44 to have a material impact on our financial
position or results of operations.

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EITF 00-02 is effective for Web site development costs incurred for fiscal
quarters beginning after June 30, 2000 (including costs incurred for projects in
process as of the beginning of the quarter). We are currently assessing the
impact of EITF 00-02 on our financial condition and results of operations.

RISKS RELATED TO OUR BUSINESS

HealthGate operates in a highly competitive and rapidly evolving Internet
industry. The risks and uncertainties described below are some of those that we
currently believe may affect our company.

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 that are tied to the number of times advertisement or
sponsorship banners are displayed to users;

- - 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.

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.

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, promoting these CHOICE Web sites and our own Web
sites and through our alliance with Snap and Xoom.com. However, we cannot 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,

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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 ranges from traditional healthcare print publishers and
distributors, to health focused and general Web sites, to large healthcare
information 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 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.

The success of our business will depend on our ability to sell a
substantial number of co-branded CHOICE Web sites. A key element of our strategy
is to expand the HealthGate Network by establishing co-branded CHOICE Web sites.
We commercially introduced our CHOICE Web site product in early 1999 and as of
March 31, 2000 had delivered 140 CHOICE Web sites to enterprise clients,
including 75 to Columbia Information Systems. We cannot guarantee that we will
be successful in selling advertising or sponsorship on these or additional sites
in the future.

Our CHOICE product is relatively new and unproven and we cannot assure you
that we will be able to sell additional CHOICE products without lowering the
price of the product. Our CHOICE product is an important part of our business
model and if we are unable to sell a substantial number of CHOICE Web sites, our
business prospects, results of operations and the market price of our common
stock could be materially adversely affected.

Our business is expanding rapidly and our business prospects may suffer if
we are not able to effectively manage the growth of our operations and
successfully attract and retain key personnel. 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 88 full-time employees
as of March 31, 2000, and we expect to add a significant number of additional
personnel in the near future. Several members of our senior management joined us
in 1999, including Mary B. Miller, our Chief Financial Officer, and Richard J.
Fecher, our Vice President of Sales. We believe the successful integration of
our senior management will be critical to our ability to effectively manage our
growth. Our rapid growth has placed a 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 resources and systems and train
and manage our employees. We cannot 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.

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 cannot guarantee that we will be able to
attract or retain these employees.

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

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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.

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.

The success of our business will depend on our ability to sell advertising
on the HealthGate Network. We derived approximately 36% of our revenue in the
quarter ended March 31, 2000 from the sale of general and targeted banner
advertising and sponsorships of discrete topic areas on the HealthGate Network.
Under our sponsorship arrangements, a sponsor's name or a message selected by
the sponsor is included on each page of the topic area together with a
click-through link to the sponsor's Web site.

Our future success depends on our ability to generate and increase revenue
from advertising and sponsorship, which will depend on a number of factors,
including:

- the development of the Internet as an advertising medium;

- the amount of traffic on the HealthGate Network and the number of
registered and unique users of our content; and

- our ability to achieve and demonstrate registered and unique user
demographic characteristics that are attractive to sponsors and
advertisers.

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
cannot 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.
Many of them have 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.

In March 1999, we entered into an 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

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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 cannot
guarantee that our disaster recovery plan is capable of being implemented
successfully. We cannot 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 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.

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.

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

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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 cannot 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 April 2001 and December 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.

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 quarter ended March 31, 2000, three customers,
Columbia Information Systems (one of our warrant holders), SelfCare, and
Blackwell Science (also a stockholder), accounted for 35%, 23%, and 8%,
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 any of them could adversely affect our business.

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," "CHOICE," "MedGate,"
"ReADER" and our HealthGate logo trademarks in the U.S. and we have pending a
U.S. application for our "activePress" trademark. 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 cannot 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.

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. In July 1999, we
received a letter from TechSearch L.L.C. claiming ownership of a patent that
claims exclusive rights to all electronic methods of on-demand remote retrieval
of graphic and audiovisual information. The letter asserted that the use of our
Web site, www.healthgate.com, infringes the patent. In the letter, TechSearch
offered to license the patent perpetually and retroactively to us for a one-time
fee of between $50,000 and $150,000 depending upon the number of "hits" per day
on our web site. We are currently investigating this matter. At this time,
however we are unable to predict its outcome.

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.

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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 cannot 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. Additionally, there is intense competition for advertising revenue on
high-traffic Web sites, which has resulted in significant price competition.

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 cannot 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.
Although we do not currently do so, 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.

21
<PAGE> 22

A feature of our own Web sites includes the retention of personal
information about our users. We have a stringent privacy policy covering this
information. However, if third parties were able to penetrate our network
security and gain access to, or otherwise misappropriate, our users' personal
information, we could be subject to liability. Such liability could include
claims for misuses of personal information, such as for unauthorized marketing
purposes or unauthorized use of credit cards. These claims could result in
litigation, our involvement in which, regardless of the outcome, could require
us to expend significant financial resources. We could incur additional expenses
if new regulations regarding the use of personal information are introduced or
if any regulator chooses to investigate our privacy practices.

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 cannot 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
cannot 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

HealthGate is not subject to any meaningful market risks related to
currency, commodity prices or similar matters. We are sensitive to short-term
interest rate fluctuations to the extent that such fluctuations impact the
interest income we receive from our investments. To minimize this risk, we
maintain our portfolio of cash equivalents and short-term investments in a
variety of securities, including commercial paper, other short-term debt
securities and money market funds. In general, money market funds are not
subject to market-risk because the interest paid on such funds fluctuates with
the prevailing interest rate. In addition, we invest in relatively short-term
securities. HealthGate does not use derivative financial instruments in its
investment portfolio. We limit our default risk by purchasing only investment
grade securities. As of March 31, 2000, all our investments were in money market
funds and interest bearing investment grade securities with an average maturity
of less than 6 months. Cash, cash equivalents, and marketable securities were
approximately $29.1 million at March 31, 2000.

PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are not currently a party to or aware of any material legal proceedings
involving us.

In July 1999, we received a letter from TechSearch L.L.C. claiming
ownership of a patent that claims exclusive rights to all electronic methods of
on-demand remote retrieval of graphic and audiovisual information. The letter
asserted that the use of our Web site, www.healthgate.com, infringes the patent.

22
<PAGE> 23

In the letter, TechSearch offered to license the patent perpetually and
retroactively to us for a one-time fee of between $50,000 and $150,000 depending
upon the number of "hits" per day on our web site. We are currently
investigating this matter. At this time, however, we are unable to predict its
outcome.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On January 31, 2000, HealthGate closed its initial public offering of
3,750,000 shares of its common stock. The managing underwriters in the offering
were SG Cowen Securities Corporation, Prudential Securities Incorporated and
Warburg Dillion Read LLC. The shares sold in the offering were registered under
the Securities Act of 1933, as amended, on a Registration Statement on Form S-1
(No. 333-76899). This Registration Statement was declared effective by the
Securities and Exchange Commission on January 25, 2000.

The initial public offering price was $11.00 per share and the aggregate
initial public offering proceeds were $41,250,000. We paid a total of $2,887,500
in underwriting discounts and commissions. In addition, the following table
itemizes the estimated expenses incurred in connection with the offering, other
than underwriting discounts and commissions. None of the amounts shown was paid
directly or indirectly to any director or officer of HealthGate or their
associates, persons owning 10 percent or more of any class of equity securities
of HealthGate or an affiliate of HealthGate.

<TABLE>
<CAPTION>
<S> <C>
Securities and Exchange Commission registration fee.................. $ 13,188
NASD filing fee...................................................... 6,848
Nasdaq National Market listing fee................................... 95,000
Printing and engraving expenses...................................... 831,000
Professional fees and expenses....................................... 1,324,000
Blue Sky fees and expenses........................................... 29,000
Transfer agent fees.................................................. 3,500
Miscellaneous........................................................ 290,464
----------
Total........................................................ $2,593,000
</TABLE>

After deducting the underwriting discounts and commissions and the offering
expenses, the net proceeds to HealthGate from the initial public offering were
approximately $35.8 million. In February 2000, we applied a total of
approximately $12,715,000 from the net proceeds to the following items.

<TABLE>
<CAPTION>
<S> <C>
First year fees to Snap! LLC......................................... $10,250,000
Repayment of long-term note.......................................... 2,000,000
Series E dividends................................................... 465,000
-----------
Total........................................................ $12,715,000
</TABLE>

The Series E dividend amount included payments of $116,000 to Blackwell
Science Ltd. and $349,000 to GE Capital Equity Investments, Inc., both of which
are principal stockholders of HealthGate.

The funds from the initial public offering have been the principal source
of liquidity for us during the quarter ended March 31, 2000 and were used to
fund operating losses and make capital expenditures as described in the
financial statements included with this report. Other proceeds from the offering
have been invested in interest-bearing, investment grade securities.

RECENT SALES OF UNREGISTERED SECURITIES

During the quarter ended March 31, 2000, we sold the following securities
in transactions exempt from the registration requirements of the Securities Act
of 1933 pursuant to Section 4(2) or Rule 701 promulgated under Regulation S-K
described below.

23
<PAGE> 24

On January 15, 2000, we issued and sold 36,355 shares of our common stock
for an aggregate consideration of $40,618.45 in cash to a director who exercised
an outstanding stock option.

On January 21, 2000, we issued and sold 3,303 shares of our common stock
for an aggregate consideration of $2,510.28 in cash to a former employee who
exercised an outstanding stock option.

On January 26, 2000, we issued and sold 8,526 shares of our common stock
for an aggregate consideration of $4,126.20 in cash to an employee who exercised
an outstanding stock option.

On January 31, 2000, HealthGate completed a private placement of 795,454
shares of common stock, at a purchase price of $11.00 per share, to NBC
Internet, Inc. 454,545 shares and GE Capital Equity Investments, Inc. 340,909 in
a transaction exempt from the registration requirements of the Securities Act of
1933 pursuant to Section 4(2).

On February 11, 2000, we issued and sold 455,890 shares of our common stock
pursuant to a cashless exercise option of an outstanding warrant issued to a
lender in March 1998.

On February 14, 2000, we issued and sold 2,181 shares of our common stock
for an aggregate consideration of $1,042.92 in cash to a former employee who
exercised an outstanding stock option.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

The following exhibits are included:

11.1 Loss per share
27.1 Financial Data Schedule

(b) REPORTS ON FORM 8-K

No reports on Form 8-K were filed by HealthGate during the quarter
ended March 31, 2000.

24
<PAGE> 25

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.

HEALTHGATE DATA CORP.

Dated: May 12, 2000 By: /s/ William S. Reece
----------------------------------
William S. Reece
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)

Dated: May 12, 2000 By: /s/ Mary B. Miller
----------------------------------
Mary B. Miller
Chief Financial Officer and
Treasurer
(Principal Financial and
Accounting Officer)

<PAGE> 1

Exhibit 11.1

HEALTHGATE DATA CORP.

LOSS PER SHARE

<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
2000 1999
---- ----
<S> <C> <C>
Computation of loss per share:

Net loss $(9,355,517) $(1,702,193)

Net loss attributable to common stockholders $(9,461,703) $(1,850,900)

Shares used in computing basic and diluted net loss per
share attributable to common stockholders 13,379,066 4,548,553

Basic and diluted net loss per share $(0.71) $(0.41)
=========== ==========
Shares used in computing proforma basic and diluted
net loss per share 15,944,421 9,220,753

Proforma basic and diluted net loss per share $(0.59) $(0.18)
=========== ==========
</TABLE>

This schedule contains summary financial information extracted from Form 10-Q
and is qualified in its entirety to such financial statements.

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-2000
<PERIOD-START> JAN-01-1999 JAN-01-2000
<PERIOD-END> DEC-31-1999 MAR-31-2000
<CASH> 578,560 833,526
<SECURITIES> 0 28,297,236
<RECEIVABLES> 791,403 1,289,729
<ALLOWANCES> (50,000) (69,145)
<INVENTORY> 0 0
<CURRENT-ASSETS> 6,138,477 44,410,243
<PP&E> 2,610,678 2,971,067
<DEPRECIATION> (1,308,310) (1,480,419)
<TOTAL-ASSETS> 27,162,922 64,256,696
<CURRENT-LIABILITIES> 7,778,558 10,310,131
<BONDS> 0 0
15,626,726 0
0 0
<COMMON> 52,192 178,347
<OTHER-SE> (1,748,408) (53,366,739)
<TOTAL-LIABILITY-AND-EQUITY> 27,162,922 64,256,696
<SALES> 0 0
<TOTAL-REVENUES> 3,241,568 2,533,266
<CGS> 2,326,688 1,103,520
<TOTAL-COSTS> 17,175,114 10,480,903
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 30,000 25,845
<INTEREST-EXPENSE> 435,058 0
<INCOME-PRETAX> (16,731,863) (9,355,517)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (16,731,863) (9,355,517)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (16,731,863) (9,355,517)
<EPS-BASIC> (5.46) (0.71)
<EPS-DILUTED> (5.46) (0.71)

</TABLE>