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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NUMBER 0-28701
HEALTHGATE DATA CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3220927
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
25 CORPORATE DRIVE, 01803
SUITE 310, (Zip Code)
BURLINGTON, MASSACHUSETTS
(Address of principal executive offices)
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K /X/
The aggregate market value of the common stock held by persons other than
affiliates as of the Registrant, as of March 26, 2001 was approximately
$2.6 million (based on the last sale price of the Registrant's common stock on
the NASDAQ National Market on that date).
The number of shares outstanding of the registrant's common stock as of
March 26, 2001 was 17,983,998.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information in the Registrant's definitive proxy statement to be
filed with the Securities and Exchange Commission relating to the Registrant's
2001 Annual Meeting of Shareholders is incorporated by reference into Part III.
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TABLE OF CONTENTS
PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 19
Item 3. Legal Proceedings........................................... 20
Item 4 Submission of Matters to a Vote of Security Holders......... 20
Executive Officers of the Registrant........................ 21
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters................................................... 22
Item 6. Selected Consolidated Financial Data........................ 23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 24
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 34
Item 8. Financial Statements and Supplementary Data................. 34
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 34
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 34
Item 11. Executive Compensation...................................... 34
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 34
Item 13. Certain Relationships and Related Transactions.............. 34
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 35
Signatures.................................................. 39
Financial Statements........................................ F-1
2
FORWARD-LOOKING STATEMENTS
This Form 10-K 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, including among other things, HealthGate's
ability to generate sufficient revenue; the Company's ability to sell a
substantial number of CHOICE Web sites; reliance on expected and continuing
growth of HealthGate's Syndication business; HealthGate's ability to develop and
implement its Intelligent eContent strategic initiative; unpredictability of
quarter-to-quarter results; the Company's ability to attract and retain key
personnel; competition; reliance on the continued growth of the Internet,
computer systems and software; reliance on content providers and strategic
alliances; and HealthGate's ability to maintain its listing on the NASDAQ market
system. Factors that might cause or contribute to such differences include, but
are not limited to those discussed in the sections "Business--Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Investors should carefully review the risks described in the other
documents the Company files from time to time with the Securities and Exchange
Commission. Investors are cautioned not to place undue reliance on the
forward-looking statements, which appear elsewhere in this report on Form 10-K.
HealthGate does not intend to update or publicly release any revisions to the
forward-looking statements.
PART I
ITEM 1. BUSINESS
OVERVIEW
HealthGate Data Corp. ("HealthGate" or the "Company") provides the highest
quality content solutions to healthcare institutions, corporations and Web sites
by leveraging web technology to supply up-to-date, comprehensive content that is
reliable, objective, and credible for professionals, patients, and consumers.
HealthGate's CHOICE eHealth platform is a dynamic integration of the information
and technology that helps transform each hospital's static web site into an
interactive medical resource for patients and physicians. It provides local
hospitals with medical content from an extensive array of health publishers--in
the form of condition related articles and topical webzines--allowing each
individual organization to create "eHealth communities" by developing closer
relationships between its patients, physicians and local health consumers. The
CHOICE eHealth platform supports the hospitals' goal to be the dominant brand
and credible source of healthcare information in the local community. The CHOICE
eHealth platform serves as a technology platform for future web initiatives,
including HealthGate's Intelligent eContent, which is in development. HealthGate
also utilizes its CHOICE platform and technology to syndicate content.
Additionally, HealthGate's activePress-TM- publishing services provides
publishers with Web-enabling services that manage the complexities of converting
and distributing traditional healthcare print materials via the Internet.
The Company commercially introduced its CHOICE Web site product in early
1999 and as of December 31, 2000, had a contracted base of over 630 hospitals.
At December 31, 2000 HealthGate also had 18 Syndication customers to which the
Company was providing its proprietary and licensed content. Additionally
HealthGate also provides content to portions of the Health Channel sections of
NBC Internet, Inc.'s portal, www.nbci.com.
The Company has aggregated and developed what it believes are the most
extensive health and medical libraries of any online provider, currently
totaling approximately 17 million different documents containing health and
medical information. HealthGate's CHOICE platform and Syndication business
utilize this content that includes internationally recognized journals,
authoritative government sources and extensive bibliographic databases
representing more than 3,000 independent content providers. HealthGate adapts
and integrates this diverse content through proprietary software and third party
search
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tools, designed to facilitate the search and retrieval of relevant information
in response to each user's searching needs.
Given the depth and breadth of HealthGate's content, the Company provides
healthcare information to a wide range of online users through its CHOICE
platform and other relationships. Whether through CHOICE customers, Syndication
customers or the NBC Internet, Inc. portal, HealthGate facilitates user-friendly
access to its content libraries by segmenting them into collections for these
three principal user groups. The online library targeted to physicians and other
healthcare professionals includes internationally recognized journals,
bibliographic databases, and continuing education programs. The patient focused
online library includes patient education materials such as a series of patient
education brochures published by the Clinical Reference Systems division of
McKessonHBOC. HealthGate has also created a proprietary series of consumer
health webzines distributed exclusively through the Web, and has produced
Condition Centers, which are compilations of selected information from the
Company's online libraries for consumers, on the most prevalent illnesses,
diseases and medical conditions. In addition, HealthGate uses its technology to
provide text conversion, Web site hosting and rights management services for
traditional print publishers, thereby increasing the number of online healthcare
resources accessible through its content libraries.
HealthGate currently generates revenue from the following activities:
- Developing CHOICE Web sites for hospitals and other enterprise clients and
distributing content through these CHOICE Web sites;
- Syndicating content to third party Web sites; and
- Providing its activePress Web publishing services to traditional print
publishers.
In 1999 and 2000, HealthGate also generated revenue from advertising. In
2001, even though HealthGate will share in a portion of the advertising revenue
from its relationship with NBC Internet, Inc. ("NBCi"), the Company does not
expect the amount of advertising revenue to be significant.
HealthGate was incorporated under the laws of the State of Delaware in 1994.
HealthGate has registered the trademarks "HealthGate," "HealthGate Data,
"CHOICE," "MedGate," "ReADER" and the HealthGate logo in the United States and
has filed a trademark registration application for "activePress" in the United
States. All other trademarks, service marks or trade names referred to in this
Report are the property of their respective owners.
HEALTHGATE'S PRODUCTS AND SERVICES
The Company has established three distinct product and service offerings:
(1) CHOICE eHealth Platform; (2) content syndication; and (3) activePress
services.
CHOICE EHEALTH PLATFORM
The CHOICE eHealth Platform is a dynamic integration of Web-native
technology, content, and applications. The platform enables healthcare
organizations to build "eHealth communities" and a comprehensive eHealth
infrastructure. The CHOICE eHealth Platform is marketed to hospitals,
pharmaceutical companies and healthcare suppliers, and is delivered in an
Application Service Provider ("ASP") model.
The Company customizes each CHOICE Web site by designing it as a seamless
component of the enterprise's existing Web site. HealthGate has developed a
number of templates for CHOICE Web site design from which it is able to conform
the design with the enterprise's own Web site. Using a standard format for the
content, developing flexible Web site templates, and the launch of the CHOICE
Platform
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3.0 has made it possible for HealthGate to generally bring a CHOICE Web site
online within 1 to 2 business days of signing an agreement with a CHOICE client.
The CHOICE eHealth Platform product line includes:
- CHOICE Community Suite
- The CHOICE Community Suite delivers locally branded eHealth content and
applications that are integrated within the customer's existing Web
strategy. Targeted towards consumers, patients, and professionals,
content is aggregated by audience type or subject. Information is
delivered to comprehensive easy-to-navigate pages, all served within
the customer's brand identity, positioning the customer's organization
as the trusted source for health and medical information in the
community.
- CHOICE Professional Suite
- The CHOICE Professional Suite is a customized, locally branded
Internet-based professional services application. The suite enables
hospitals and health systems to strengthen relationships with
physicians and offer an employee benefit. The Professional Suite offers
access to medical and clinical research through professional databases
such as CANCERLIT-Registered Trademark-, CINAHL-Registered Trademark-,
and MEDLINE-Registered Trademark-.
CONTENT SYNDICATION
HealthGate's Syndication business provides a comprehensive business offering
by delivering the most reliable and up-to-date medical information to
physicians, patients, and members of the pharmaceutical, payor, and healthcare
communities. Customized product offerings include the "Total Living Centers,"
which aggregate data and articles in a user-friendly manner to focus on those
chronic illnesses and conditions that pose the greatest risk to a healthy
lifestyle. These Total Living Centers were created to help consumers assess and
understand specific medical conditions in order to make better-informed
decisions for themselves and their families. The Centers offer depth and breadth
of disease centric eHealth content for both consumers and healthcare
professionals. In addition, the Centers feature management tools that enable the
consumer to enhance compliance with their prescribed treatment regimen.
ACTIVEPRESS SERVICE FOR PUBLISHERS
HealthGate's activePress service, which was launched in 1998, offers 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 are
developed and hosted by HealthGate. The activePress service utilizes
HealthGate's 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 and CrossRef,
enabling the publisher to deliver an enhanced electronic version of the print
publication to subscribers, institutions and authorized third parties.
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 transactional fees, which may be paid
by the user or the publisher, are derived on a per subscriber, per page or per
article basis. The company does not expect revenue from these fees to be
significant.
Blackwell Science and Munksgaard, an affiliate of Blackwell Science, are
currently clients of HealthGate's activePress service. See "--Strategic
Affiliations and Relationships--Content."
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NBCI WEB PORTAL ALLIANCE
The Company provides access to selected portions of its content libraries to
users of www.nbci.com, a Web portal site. Web portal sites aggregate content
from various sources and make the content, or links to the content, available on
a single Web site, organized into related groupings of content, typically called
channels. Beginning in March 2000, HealthGate was the anchor tenant, or most
prominent provider of healthcare information, for certain areas of NBCi's Health
Channel.
THE WWW.HEALTHGATE.COM WEB SITE
In order to concentrate on its CHOICE product, content syndication and
activePress businesses and its Intelligent eContent initiative, HealthGate chose
to phase out access to healthcare content from its public web site, located at
www.healthgate.com in November 2000. The www.healthgate.com site now offers
information about the Company's various products and services, including the
CHOICE business unit and links to CHOICE Web sites. In addition, the
www.healthgate.com Web site seamlessly redirects visitors to portions of
HealthGate's content libraries located at the co-branded NBCi/HealthGate section
of the NBCi Web portal site.
ADVERTISING AND SPONSORSHIP
In order to concentrate on the service aspect of its CHOICE, Syndication
activePress and Intelligent eContent businesses, the Company chose to phase out
its advertising, sponsorship and e-commerce operations in November 2000.
HealthGate, through its relationship with NBCi, is currently continuing to serve
advertising promotions for certain advertisers, on those portions of the NBCi
Health Channel which carry HealthGate's content, in order to fulfill their
advertising orders.
As part of the relationship with NBCi, HealthGate receives a portion of the
advertising and sponsorship revenues appearing on the co-branded NBCi/HealthGate
portions of the NBCi Web site. To date these amounts have not been significant.
INTELLIGENT ECONTENT INITIATIVE
In 2000, HealthGate undertook a project, the Intelligent eContent
initiative, which is designed to enable select content assets in the Company's
hosted repository to be integrated into a wide range of clinical and
administrative applications. By enhancing its content with additional medical
vocabularies, such as ICD-9-CM and SNOMED codes, HealthGate plans to be able to
link or associate them directly with existing healthcare applications, services
and information such as appointment scheduling, billing and reimbursement
inquiries, delivery of clinical results and receipt of prescriptions. The
Company believes that Intelligent eContent products and services will strengthen
HealthGate's existing business and further grow the Company's business as a
provider to healthcare suppliers. The Intelligent eContent initiative is in an
early development stage. No significant revenue from Intelligent eContent is
expected in 2001.
HEALTHGATE CONTENT
The Company believes it offers 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, currently totaling
approximately 17 million different documents containing healthcare information
from scores of sources. The Company's content libraries are updated regularly
with the latest available health and medical information, on a daily, weekly or
monthly basis, or as appropriate. These content libraries are segmented into
appropriate collections to facilitate access for professionals, patients and
consumers.
Generally, certain licensed content, including the Health Advisors from
Clinical Reference Systems, is free to users of a hospital's CHOICE Web site, a
syndication client's Web site or the NBCi Health
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Channel. Other licensed content, from companies that include CINAHL, Integrative
Medicine, Nidus Information Services and Micromedex is accessible through some
CHOICE Web sites to certain users who have been authorized by the customer. In
order to meet the needs of their communities of users, CHOICE Web site clients
and licensees of the Company's syndicated content pay additional fees to make
selected portions of HealthGate's libraries available to their users.
HealthGate compiles its 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 its activePress
publishing clients in conjunction with providing these clients with Web site
development and hosting services.
LICENSED CONTENT
This category includes well-known, independent and authoritative health and
medical content licensed by HealthGate for distribution through CHOICE sites,
content syndication and the NBCi portal. This content is typically peer-reviewed
and many of the Company's 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 and CANCERLIT, produced by the National Cancer Institute, and
continuing education programs, such as those provided by HealthStream; and
- Patient education and consumer health materials, such as 411Cancer from
Cancer Consultants, the Merriam Webster Medical Dictionary, the Advisor
Series of over 3,000 informational brochures from Clinical Reference
Systems, and compilations of information that HealthGate prepares on the
most prevalent medical conditions, illnesses and diseases and makes
available through the Company's Condition Centers.
All licensed content must meet certain criteria prior to being added to
HealthGate's 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 eleven Web-based consumer health magazines
produced by HealthGate called "Healthy Living". The Webzines in the Healthy
Living series are:
- Aging & Health
- Sports & Fitness
- Food & Nutrition
- Men's Health
- Mental Health
- Kids' & Teens' Health
- Medications
- Sexuality & Health
- Travel & Health
- Women's Health
- Alternative Health
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Articles for these publications are written by medical writers, physicians,
dentists, dieticians and nurses exclusively for HealthGate. 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 comprises five physicians affiliated with
institutions including Harvard University School of Medicine, Boston University
School of Medicine, Massachusetts General Hospital, Dana Farber Cancer Institute
and the Tufts University School of Medicine who review articles for HealthGate
on a fee for service basis. In order to assure accurate and high quality
content, all articles are reviewed prior to publication by medical editors and
by HealthGate's Editorial Board. HealthGate intends to develop additional
proprietary content in the future.
ACTIVEPRESS CONTENT
This category currently includes all medical, scientific and technical
journals published by the worldwide publishing units of Blackwell Science and
Munksgaard. Through its activePress service, HealthGate converts these journals
for delivery through the Internet and provides access to the converted journals
by developing and hosting these publishers' Web sites. In addition to being paid
a fee for its activePress development, implementation and hosting services, the
Company receives the right to distribute these journals on its CHOICE sites,
Syndication sites, and on the NBCi portal.
STRATEGIC AFFILIATIONS AND RELATIONSHIPS
HealthGate believes that strategic affiliations and relationships can enable
the Company to develop and further distribute its products and services, acquire
content more rapidly, generate additional traffic on its CHOICE Web sites and
its sections of the Health Channel of the NBCi Portal and capitalize on
additional revenue opportunities. The Company has entered into strategic
affiliations and relationships for marketing and online distribution and
healthcare content with the following companies:
MARKETING AND DISTRIBUTION
COLUMBIA INFORMATION SYSTEMS, INC. In November 1999, HealthGate entered
into a three-year development agreement with Columbia Information
Systems, Inc., a subsidiary of HCA (formerly Columbia/HCA Healthcare
Corporation), to design, develop and maintain customized, co-branded CHOICE Web
sites for up to 280 HCA hospitals and affiliates. The agreement provides for an
annual license fee of $3.5 million to be paid by Columbia Information Systems
for all products and services that HealthGate provides under the agreement. The
agreement can be terminated without cause by Columbia Information Systems on
June 1, 2001, upon payment of a $1.0 million termination fee to HealthGate.
HealthGate began delivering customized co-branded CHOICE Web sites pursuant to
this agreement in December 1999. As of December 31, 2000, the Company had
delivered 203 customized co-branded CHOICE websites to HCA hospitals.
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In November 1999, HealthGate entered into a separate three-year marketing
and reseller agreement with Columbia Information Systems under which Columbia
Information Systems agreed to endorse HealthGate as the preferred provider of
patient and consumer oriented health content for Web sites owned or operated by
HCA hospitals and affiliates. The agreement provides HealthGate, among other
things, the right to make a first offer to provide services for adding content
to the Columbia Information Systems' health portal site and any Web site owned
or operated by or affiliated with Columbia Information Systems or HCA. Further,
Columbia Information Systems may, for a commission, market and sell the CHOICE
Web site product to entities unaffiliated with HCA, subject to HealthGate's
approval. In connection with this agreement HealthGate issued a warrant to CIS
Holdings for the purchase of up to 1,941,035 shares of its common stock. The
warrant has a term of three years, an exercise price per share equal to the
initial public offering price of $11.00 and became exercisable in January 2000
upon HealthGate's initial public offering. The fair value of this warrant was
determined to be $13.5 million using the Black-Scholes option pricing model.
This amount was recorded as marketing and distribution rights, and is being
amortized on a straight-line basis over the three-year contractual term of the
related agreement. During the years ended December 31, 2000 and 1999, HealthGate
recorded amortization expense of $4.5 million and $0.8 million, respectively.
During the fourth quarter of 2000, as a result of recent events at the
Company and in its industry, HealthGate undertook an evaluation of its
intangible assets for potential impairment under SFAS 121 "Accounting for
Long-Lived Assets and Long-Lived Assets to be Disposed of." Based on this review
the Company determined that a write-down to the carrying value of its marketing
and distribution rights asset was appropriate. This conclusion was based on the
Company's continued operating losses and workforce reduction, and a modification
of its business model to expand focus beyond the hospital market. The Company
used a discounted cash flow model, applying a discount rate to projected net
cash flow relating to this marketing and distribution rights agreement through
its remaining term, and arrived at an estimated fair value for the asset of
approximately $1.3 million. The Company's results of operations for the year
ended December 31, 2000 include a charge of $6.9 million relating to this
impairment. This impairment assessment required certain significant estimates,
including estimated future cash flows associated with the marketing and reseller
agreement. The remaining asset amount of $1.3 million could be subject to
further impairment in the near term if future cash flows are less than
anticipated.
NBC INTERNET, INC. In October 1999, HealthGate entered into a three-year
strategic alliance agreement with Snap! LLC and Xoom.com, Inc. The rights of
Snap! LLC and Xoom.com, Inc. were subsequently assigned to NBC Internet, Inc.
("NBCi"). Under the original agreement, NBCi was to provide various services to
promote HealthGate's name, the www.healthgate.com Web site, enterprise-based
CHOICE Web sites and the products and services HealthGate offers. In exchange
for the services provided to HealthGate by NBCi during the first year of the
agreement, HealthGate paid Snap a minimum cash fee of $10 million plus a
$0.3 million production and content integration fee, and in November 1999,
HealthGate issued to Snap 500,000 shares of its common stock. The value of these
shares was $4.5 million at the time of issuance, which was recorded as prepaid
advertising. The value of 250,000 shares was amortized as sales and marketing
expense on a straight-line basis in 2000, and the value of the other 250,000
shares was recognized based on the delivery of advertising impressions in the
first year of the agreement. In September 2000, HealthGate amended this
agreement. Pursuant to the amendment, HealthGate agreed to redirect its user
traffic from www.healthgate.com to the Health Channel section of NBCi's consumer
Internet portal at www.nbci.com so that NBCi could count all user traffic as
part of its total user base. During 2000, HealthGate recorded expense totaling
$14.6 million related to this agreement which includes $4.5 million of non-cash
amortization expense related to the stock issued.
In March 2001, HealthGate further amended its agreement with NBCi. Under the
amended agreement, HealthGate has issued a warrant to NBCi to purchase 200,000
shares of HealthGate common stock and will pay $2.1 million in cash in 2001 and
$2.8 million in cash in 2002, in return for being the anchor tenant on the men's
health, women's health and drugs and medications sections of the health
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channel of the NBCi portal through October 2002 and sharing a portion of
advertising and sponsorship revenue derived from the co-branded
www.healthgate.nbci.com Web site. The agreement calls for HealthGate to continue
to provide content to NBCi through October 2004. If NBCi 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 NBCi 65% of all fees payable under the remaining term
of the amended agreement.
GE MEDICAL SYSTEMS. In June 1999, HealthGate 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, HealthGate agreed to develop and host GE Medical Systems branded
enhanced versions of the Company's CHOICE Web site product. GE Medical Systems
has 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 the standard CHOICE Web site product to a select
group of hospitals and other patient care facilities. In addition, GE Medical
Systems has the non-exclusive right to sell the standard CHOICE Web site product
to other healthcare institutions, subject, in certain cases, to HealthGate's
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 HealthGate's CHOICE Web sites and the enhanced GE Medical Systems
branded versions of the CHOICE Web sites. Revenue derived from CHOICE Web sites
sold by GE Medical Systems will be shared by GE Medical Systems and HealthGate.
The initial term of this development and distribution agreement with GE Medical
Systems was one year and is renewable annually by mutual agreement. During 2000,
the agreement was renewed for an additional one year period.
CONTENT
BLACKWELL SCIENCE LTD. Through the Company's activePress service,
HealthGate is the exclusive developer on the Web of a collection of
approximately 300 full text journals for Blackwell Science. Blackwell Science is
one of the largest publisher of medical societies' journals and one of the
world's largest medical publishers. The Company has converted and currently
offers online approximately 300 of Blackwell's peer reviewed journal titles. As
part of this service, HealthGate makes these journals available to Blackwell
Science's individual and institutional subscribers through the
www.blackwell-synergy.com Web site, developed and hosted by HealthGate. This
hosting service includes storing and maintaining all converted journals on
HealthGate's 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 sites. HealthGate has the right to syndicate these
journals to its CHOICE and Syndication customers and share transactional fees
for each Blackwell journal article purchased from the hosted Web site. In
March 2001, this activePress relationship with Blackwell Science was extended to
run through December 2001.
SALES AND MARKETING
HealthGate sells its products and services through its own direct sales
force and through value added resellers. The direct sales force is divided into
seven direct sales regions for CHOICE Web site sales and syndication sales. Each
region is assigned a direct sales representative. The sales group is supported
by an account management group, who are responsible for facilitating the entire
sales process, identifying leads through telemarketing and supporting customers.
The account management group's support functions include maintenance of customer
and prospect databases, online demonstration sessions, preparation of
presentations and proposals and development of relationships with current and
future clients.
In June 1999, HealthGate entered into a development and distribution
relationship with GE Medical Systems pursuant to which GE Medical Systems was
able to sell the CHOICE Web site product and GE
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Medical Systems branded enhanced versions of the CHOICE Web site product through
its worldwide sales force into its worldwide customer base of hospitals and
other patient care facilities. See "--Strategic Affiliations and
Relationships--Marketing and Distribution," above.
HealthGate presently markets its products and services through traditional
means, including direct mail, print advertising and telemarketing.
CUSTOMER SERVICE
HealthGate is committed to providing a high level of service and support to
its clients and users. The Company believes that customer service is important
to its ability to attract and retain clients and users. HealthGate provides
service and support via a toll-free telephone number, e-mail and, on the Web
sites themselves, through help screens and Frequently Asked Questions (FAQ)
areas.
TECHNOLOGY
The Company's technology consists of internally developed and commercially
available software programs. All of HealthGate's on-line products are hosted at
a remote data center using Intel-based computers running Microsoft Windows 2000
server products. The software architecture makes extensive use of Active Server
Pages, component technology, XLM/XLS, and relational databases. Scalability and
stability of the platform is achieved through load-balancing and complete
redundancy of all servers. In addition, the software architecture uses a
data-driven approach to provide extensive configuration and flexibility in the
products.
There are three specific areas of development that contribute to the
Company's products: (1) Content Normalization, (2) Content Enhancement, and
(3) Content Delivery.
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. The use of XML in the content normalization module
enables HealthGate to offer, through Content Delivery, multiple product
offerings with different features, while using the same content from the same
repository.
CONTENT ENHANCEMENT
Content is indexed by a standard word-count-frequency search engine. This
allows content to be accessed by users that specify a word or phrase that occurs
somewhere in the body of the content. It also allows users to specify word or
phrases that are part of the structure (i.e. the "tagging") of the content. The
searching module enables professionals, patients and consumers access to content
without regard for the level of their expertise, knowledge of medical terms or
knowledge of the specific database searching commands.
Content may also be indexed using standard medical vocabularies and coding
systems that are in widespread use throughout the nation's healthcare system. By
using standard vocabularies content can be associated with very exact,
meaningful concepts related to healthcare. This allows users to request only the
specific content that relates to the desired medical concept.
11
CONTENT DELIVERY
DYNAMIC FORMATTING. The dynamic formatting module allows for active layout
of content for presentation to the user. Formatting can be based upon specific
information, such as 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
HealthGate the option of having multiple product offerings with different
features, while using the same content from the same repository.
AUTHENTICATION, ACCESS CONTROL AND E-COMMERCE. The authentication, access
control and e-commerce module confirms a user's identity, allows the user access
to 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 usage basis. These sales can be via a one-time credit card transaction or
through institutional access. This module allows HealthGate 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.
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 the Company expects that competition will continue to grow.
HealthGate competes, directly and indirectly, for subscribers, consumers,
content and service providers and acquisition candidates with a variety of
companies. Presently, HealthGate's competitors include the following types of
companies:
- Web-native companies targeting the healthcare industry such as
HealthCentral, LaurusHealth, WellMed, and InteliHealth;
- Health and medical print and electronic publishers targeting the
healthcare enterprise such as StayWell, Healthwise, Health Ink & Vitality,
and Adam.com;
- Healthcare consulting and Web development firms such as Medseek,
Greystone.net, and Consumer Health Interactive; and
- Large healthcare information system (HIS) vendors such as McKessonHBOC and
Cerner Corp.
Many of HealthGate's 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.
The Company believes that the principal competitive factors in its target
markets are comprehensiveness of content, integration with existing
technologies, pricing, performance, ease of use, features and quality of
support. See "--Risk Factors-HealthGate faces intense competition in providing
its Internet-based healthcare information products and services and it may not
be able to compete effectively."
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.
12
Internet user privacy has become an issue both in the United States and
abroad. Recent regulations from the U.S. Department of Health and Human Services
concerning The Health Insurance Portability and Accountability Act of 1996
("HIPAA") may impact how HealthGate collects data about its CHOICE sites and
reports this information to these sites. In addition, 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 additional regulations imposed to protect the privacy of
Internet users may affect the way in which HealthGate currently collects and
uses personal information.
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 HealthGate's Web sites or otherwise
materially adversely affect the Company's business. See "--Risk Factors."
INTELLECTUAL PROPERTY
HealthGate regards its intellectual property as important to its business,
and relies upon trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with the Company's employees,
customers, strategic partners and others to protect its rights in this property.
Effective trademark, copyright and trade secret protection may not be available
in every country in which the Company's products and media properties are
distributed or made available through the Internet. Therefore, HealthGate cannot
guarantee that the steps it has taken to protect its 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 these
proprietary rights to the same extent as do the laws of the United States.
HealthGate licenses the majority of its content from third parties. Under
most of the license agreements, the licensor has agreed to defend and indemnify
HealthGate for losses with respect to third-party claims that the licensed
content infringes third-party proprietary rights. HealthGate cannot assure
investors that these provisions will be adequate to protect the Company from
infringement claims.
HealthGate also relies on a variety of technologies that are licensed from
third parties, including database and Internet server software, which is used
for HealthGate's Web sites to perform key functions. These third-party licenses
may not be available 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--HealthGate's
business may suffer if it is not able to effectively protect its intellectual
property rights."
EMPLOYEES
As of December 31, 2000, HealthGate had a total of 79 full-time employees.
Of these employees, 34 serve in research and development, 18 serve in
administration and 27 serve in sales and marketing. None of HealthGate's
employees is represented by a labor union. The Company considers its
relationship with its employees to be good.
RISK FACTORS
HealthGate's business involves significant risks and uncertainties,
including those described below.
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
HealthGate currently believe may affect the Company.
13
FAILURE TO GENERATE SUFFICIENT REVENUES, OR RAISE ADDITIONAL CAPITAL WILL
HAVE A MATERIAL ADVERSE EFFECT ON HEALTHGATE'S LONG-TERM VIABILITY AND ITS
ABILITY TO ACHIEVE ITS INTENDED BUSINESS OBJECTIVES. At December 31, 2000, the
Company had $14.9 million of cash and marketable securities and $6.5 million of
working capital. The Company has incurred substantial losses and negative cash
flows from operations in every fiscal year since inception. In the years ended
December 31, 1998, 1999 and 2000, the Company incurred net losses of
$2.9 million, $16.7 million and $49.5 million, respectively, and negative cash
flows from operations of $2.5 million, $5.7 million and $21.5 million,
respectively. Additionally, as of December 31, 2000, the Company had an
accumulated deficit of $85.6 million.
In the fourth quarter of 2000 and the first quarter of 2001, the Company
took several actions to substantially reduce operating cash outflows. These
actions included reducing the Company's workforce in December 2000, amending the
Company's agreement with NBCi to significantly reduce required cash payments,
and amending or canceling several content arrangements. Further, if the Company
does not achieve its forecasted revenue levels in 2001, management is prepared
to implement additional cost reductions.
Based on the Company's current forecasted cash flows and its cash and
marketable securities on hand, the Company expects to have sufficient cash to
finance its operations through at least 2001. The Company's future beyond 2001
is dependent upon its ability to achieve break-even or positive cash flow, or
raise additional financing. There can be no assurances that the Company will be
able to do so.
The Company's future liquidity and capital requirements will depend upon
numerous factors, including the success of existing and new application and
service offerings. The Company currently anticipates its cash resources will be
sufficient to meet the presently anticipated working capital, capital
expenditures and business expansion requirements for at least the next twelve
months. However, the Company 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. The Company 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 the Company, or at all.
THE SUCCESS OF THE COMPANY'S BUSINESS WILL DEPEND ON HEALTHGATE'S ABILITY TO
SELL A SUBSTANTIAL NUMBER OF CHOICE WEB SITES. A key element of the Company's
strategy is to license co-branded CHOICE Web sites. HealthGate commercially
introduced the CHOICE Web site product in early 1999 and as of December 31, 2000
had a contracted base of over 630 hospitals.
HealthGate's CHOICE product is relatively new and unproven and HealthGate
cannot assure the investor that HealthGate will be able to sell additional
CHOICE products without lowering the price of the product. HealthGate's CHOICE
product is an important part of the Company's business model and if HealthGate
is unable to sell a substantial number of CHOICE Web sites, HealthGate's
business prospects, results of operations and the market price of the Company's
common stock could be materially adversely affected.
THE SUCCESS OF THE COMPANY'S BUSINESS WILL DEPEND UPON THE CONTINUING GROWTH
OF HEALTHGATE'S SYNDICATION BUSINESS. The Company's strategy is to continue to
increase the number of content syndication agreements. As of December 31, 2000,
HealthGate had 18 syndication customers. Failure to sell additional content
syndication licenses could have an adverse effect on the Company's results of
operations and the market price of the Company's stock.
THE MAJORITY OF HEALTHGATE'S REVENUE HAS HISTORICALLY BEEN DERIVED FROM A
FEW CUSTOMERS AND THE LOSS OF ANY OF THESE CUSTOMERS COULD ADVERSELY AFFECT THE
COMPANY'S BUSINESS. Historically, HealthGate has generated a substantial
portion of its revenue from a few customers. For the year ended December 31,
2000, three customers, HCA (a HealthGate warrant holder), Medical
SelfCare, Inc. ("SelfCare"), a company no longer in operation, and Blackwell
Science (also a stockholder), accounted for 33%, 16%, and 8%, respectively, of
the Company's total revenue. HealthGate expects to continue to generate a
substantial
14
portion of its revenue in the near future from HCA and Blackwell Science and the
loss of either of them could adversely affect the Company's business. All of the
revenue from SelfCare was recognized in the first six months of 2000 for
services provided by HealthGate under the e-commerce/sponsorship agreement with
SelfCare. HealthGate provided SelfCare notice of termination of the agreement
based upon SelfCare's failure to pay fees under the agreement. Subsequently,
litigation was commenced and settled concerning the agreement. See "Legal
Proceedings."
THE QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, WHICH MAY
AFFECT THE MARKET PRICE OF HEALTHGATE'S COMMON STOCK IN A MANNER UNRELATED TO
THE COMPANY'S LONG-TERM PERFORMANCE. The Company expects quarterly revenue,
expenses and operating results to fluctuate significantly in the future, which
could affect the market price of the common stock in a manner unrelated to the
Company's long-term operating performance. Quarterly fluctuations could result
from a number of factors, including:
- Addition of new content providers or changes in the Company's
relationships with its most important content providers, which may require
more expenditures in the early stages of these relationships;
- The amount and timing of expenses required to integrate operations and
technologies from joint ventures or other business combinations or
investments.
HEALTHGATE'S BUSINESS IS EXPANDING, AND THE COMPANY'S BUSINESS PROSPECTS MAY
SUFFER IF IT IS NOT ABLE TO EFFECTIVELY MANAGE THE GROWTH OF ITS OPERATIONS AND
SUCCESSFULLY ATTRACT AND RETAIN KEY PERSONNEL. Since HealthGate began its
business in 1994, the Company has significantly expanded its operations over a
short period of time. HealthGate has grown from 3 employees at the end of 1994
to 79 full-time employees as of December 31, 2000. During 2000 and prior to the
filing of this report in 2001, HealthGate's Chief Financial Officer, Chief
Technology Officer and Vice President of Sales left the Company. A new Chief
Financial Officer joined HealthGate in September 2000, and the Company has
combined the responsibilities of the Vice President of Sales and the Vice
President of Content into a new position--Vice President of Business
Development. The Company has not yet appointed a new Executive Chief Technology
Officer.
HealthGate's future success will depend in large part on HealthGate's
ability to implement, improve and effectively utilize its operational,
management, marketing and financial resources and systems and train and manage
it employees. HealthGate cannot guarantee that its management team will be able
to effectively manage the Company's operations or that its systems, procedures
and controls will be adequate to support its operations.
HealthGate's future success also depends on the Company's 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 the Company cannot guarantee
that it will be able to attract or retain these employees.
HEALTHGATE'S ABILITY TO DEVELOP AND IMPLEMENT ITS INTELLIGENT ECONTENT
STRATEGIC INITIATIVE WILL AFFECT THE COMPANY'S LONG-TERM SUCCESS. HealthGate
has undertaken a project to assign multiple medical indexing vocabularies, such
as ICD-9-CM and SNOMED, to selected content assets in the Company's hosted
repository. The Company believes that the success of this initiative will
strengthen its position in the marketplace by allowing HealthGate to interface
with a wide range of clinical and administrative applications, such as
scheduling tools, electronic medical records, laboratory results and
pharmaceutical systems, and open up additional markets such as insurance
companies, managed care and pharmaceutical companies. There can be no assurance
that the Company will be able to successfully develop the software tools
necessary to efficiently add the vocabularies to its content repository nor can
it be assumed that HealthGate can effectively market this new initiative to its
existing customers or beyond its CHOICE market. If HealthGate is unsuccessful at
either, then the future success of the Company may be affected.
15
HEALTHGATE FACES INTENSE COMPETITION IN PROVIDING THE COMPANY'S
INTERNET-BASED HEALTHCARE INFORMATION PRODUCTS AND SERVICES AND 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 the Company expects 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 HealthGate competes, directly and
indirectly, for customers, consumers, content and service providers, 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 the Company's 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.
THE PERFORMANCE OF HEALTHGATE'S WEB SITES AND COMPUTER SYSTEMS IS CRITICAL
TO ITS BUSINESS AND THE BUSINESS WILL SUFFER IF THE COMPANY EXPERIENCES SYSTEM
FAILURES. The performance of HealthGate's Web sites and computer systems is
critical to the Company's reputation and ability to attract and retain users,
customers, advertisers and subscribers. HealthGate provides 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 the Company's existing systems. Although
HealthGate has only experienced one minor unscheduled service interruption of
approximately four hours since the beginning of 1998, the Company cannot
guarantee that it will not experience more significant service interruptions in
the future. The Company is also dependent upon Web browsers and Internet service
providers to provide Internet users access to its 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. The Company also
depends on certain information providers to deliver information and data feeds
to it on a timely basis. HealthGate 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 the Company's content or an increase in
response time on the Company's Web sites could cause it to lose potential or
existing users, customers, advertisers or subscribers and could result in damage
to its reputation and brand name or a decline in the Company's stock price.
In March 1999, HealthGate entered into an Internet Data Center Services
Agreement with Exodus Communications, Inc. to house all of the Company's central
computer facility servers at Exodus's Internet Data Center in Waltham,
Massachusetts. HealthGate does not presently maintain fully redundant systems at
separate locations, so the Company's 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 HealthGate's Internet access will be uninterrupted, error-free or secure.
HealthGate has also developed a disaster recovery plan to respond to system
failures. HealthGate cannot guarantee that its disaster recovery plan is capable
of being implemented successfully. HealthGate cannot guarantee that the
Company's insurance will be adequate to compensate it for all losses that may
occur as a result of any system failure.
HEALTHGATE RETAINS CONFIDENTIAL CUSTOMER INFORMATION IN THE COMPANY'S
DATABASE AND IF IT FAILS TO PROTECT THIS INFORMATION AGAINST SECURITY BREACHES
HEALTHGATE MAY LOSE CUSTOMERS. HealthGate retains personally identifiable
information in its database. Therefore, it is critical that the Company's
facilities and infrastructure remain secure and that they are perceived by
consumers to be secure. Despite the implementation of security measures, the
Company's 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 the Company.
HealthGate believes that
16
maintaining the trust of its customers is important for it to be able to grow
the Company's business and, therefore, HealthGate believes that any damage to
its reputation or liability arising from one or more security breaches could
adversely affect the Company's business, results of operations and the market
price of the Company's common stock.
HEALTHGATE'S BUSINESS PROSPECTS MAY SUFFER IF THE COMPANY IS 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
the Company's systems and, in turn, its products and services, obsolete and
unmarketable or require the Company to make significant unanticipated
investments in research and development to upgrade its systems in order to
maintain the marketability of its products. To be successful, the Company must
continue to license or develop leading technology, enhance its existing products
and services and respond to emerging industry standards and practices on a
timely and cost-effective basis. If the Company is 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 it operates, the company's business, results of operations and the market
price of the Company's common stock could be adversely affected.
HEALTHGATE MAY BE SUBJECT TO LIABILITY FOR INFORMATION RETRIEVED FROM THE
COMPANY'S WEB SITE. As a publisher and distributor of online information,
HealthGate 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 by the Company. HealthGate 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. HealthGate could be subject to liability with respect to
content that may be accessible through the Company's Web site or third party
CHOICE, Syndication or activePress Web sites. For example, claims could be made
against HealthGate if a professional, patient or consumer relies on healthcare
information accessed through one of HealthGate's CHOICE, Syndication or
activePress Web sites to their detriment. Even if any of the kinds of claims
described above do not result in liability to the Company, HealthGate could
incur significant costs in investigating and defending against them and in
implementing measures to reduce its exposure to this kind of liability. The
Company's 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 HealthGate for all liability that may be imposed.
HEALTHGATE DEPENDS ON THE COMPANY'S CONTENT PROVIDERS, AS THE SUCCESS OF
HEALTHGATE'S BUSINESS DEPENDS ON ITS ABILITY TO PROVIDE A COMPREHENSIVE LIBRARY
OF HEALTHCARE INFORMATION. With the exception of the Company's Healthy Living
series of Webzines, HealthGate licenses the majority of its 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. The Company plans to increase the amount of proprietary content
that it makes available to customers. HealthGate cannot guarantee that it will
be able to continue to license its present content or sufficient additional
content to provide a diverse and comprehensive library nor can the Company
guarantee that it will be successful in developing new proprietary content. In
the future, HealthGate may not be able to license content at reasonable cost. In
addition, one or more of the Company's publishers or other content providers may
grant one of the Company's competitors an exclusive arrangement with respect to
a significant database or periodical, or elect to compete directly against
HealthGate by making its content exclusively available through its own Web site.
FAILURE TO REGAIN COMPLIANCE WITH THE LISTING REQUIREMENTS FOR THE NASDAQ
MARKET SYSTEM COULD RESULT IN THE COMPANY'S STOCK BEING DELISTED FROM NASDAQ
WHICH MAY ADVERSELY AFFECT THE MARKET PRICE OF HEALTHGATE'S STOCK IN A MANNER
UNRELATED TO THE COMPANY'S PERFORMANCE. On December 8, 2000, HealthGate was
notified by The NASDAQ Stock Market, Inc. that the Company was no longer in
compliance with certain NASDAQ listing requirements and that failure to correct
these conditions on or before March 8, 2001,
17
could result in the delisting of the Company's stock. On March 9, 2001, the
Company was notified by NASDAQ of its intention to delist the Company's stock.
The Company has requested a hearing, which has been scheduled for April 26, 2001
to appeal NASDAQ's delisting decision. The Company's stock will continue to
trade on NASDAQ until after a decision is rendered from the hearing. The Company
cannot assure investors as to when NASDAQ will reach a decision, whether such a
decision will be favorable to the Company or what effect a delisting would have
on the market price of the Company's stock.
HEALTHGATE'S BUSINESS MAY BE ADVERSELY AFFECTED IF THE COMPANY IS NOT ABLE
TO EFFECTIVELY PROTECT ITS INTELLECTUAL PROPERTY RIGHTS. HealthGate regards its
trademarks, service marks, copyrights, trade secrets and similar intellectual
property as important to its business, and the Company relies upon trademark and
copyright law, trade secret protection and confidentiality and/or license
agreements with its employees, customers, strategic partners and others to
protect its rights in this property. HealthGate has registered the Company's
"HealthGate," "HealthGate Data," "CHOICE," "MedGate," "ReADER", and its
HealthGate logo trademarks in the U.S. and the Company has pending a U.S.
application for its "activePress" trademark. Effective trademark, copyright and
trade secret protection may not be available in every country in which
HealthGate products and services are distributed or made available through the
Internet. Therefore, HealthGate cannot guarantee that the steps it has taken to
protect its 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 HealthGate believes that its proprietary rights do not infringe on
the intellectual property rights of others, other parties may assert
infringement claims against the Company or claim that the Company has 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
HealthGate spending a significant amount of time and money to dispose of them.
In July 1999, HealthGate received a letter from a company (the "Holder")
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 HealthGate's Web site, www.healthgate.com,
infringes the patent. In the letter, the Holder offered to license the patent
perpetually and retroactively to HealthGate for a one-time fee of between
$50,000 and $150,000 depending upon the number of "hits" per day on the
Company's web site. There has been no recent activity on this matter and at this
time, HealthGate is unable to predict its outcome. See "Legal Proceedings."
HEALTHGATE'S BUSINESS MAY BE ADVERSELY AFFECTED IF THE COMPANY IS UNABLE TO
CONTINUE TO LICENSE SOFTWARE THAT IS NECESSARY FOR THE DEVELOPMENT OF PRODUCT
AND SERVICE ENHANCEMENTS. HealthGate relies on a variety of technologies that
are licensed from third parties, including the Company's database software and
Internet server software, which is used in HealthGate's Web sites to perform key
functions. These third party licenses may not be available to HealthGate 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.
GOVERNMENT REGULATION OF THE INTERNET MAY RESULT IN INCREASED COSTS OF USING
THE INTERNET, WHICH COULD ADVERSELY AFFECT HEALTHGATE'S 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 the Company's business, results of operations and the market
price of the Company's common stock.
PRIVACY-RELATED REGULATION OF THE INTERNET COULD ADVERSELY AFFECT
HEALTHGATE'S BUSINESS. Internet user privacy has become an issue both in the
United States and abroad. The Federal Trade Commission, Department of Health and
Human Services and government agencies in some states and countries have
18
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 HealthGate currently collects and uses 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. HealthGate cannot assure you that this directive will not
adversely affect the Company's activities in EU member states.
A feature of HealthGate's Web sites includes the retention of personal
information about its users. HealthGate has a stringent privacy policy covering
this information. However, if third parties were able to penetrate HealthGate's
network security and gain access to, or otherwise misappropriate, its users'
personal information, HealthGate 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, HealthGate's involvement in which, regardless
of the outcome, could require HealthGate to expend significant financial
resources. HealthGate could incur additional expenses if new regulations
regarding the use of personal information are introduced or if any regulator
chooses to investigate HealthGate's 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 federal law passed in
October 1998 places a temporary moratorium on certain types of taxation on
Internet commerce. HealthGate 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
HealthGate's transmission of content on its Web sites and on its CHOICE,
Syndication and activePress Web sites. Any new legislation, regulation or
application or interpretation of existing laws would likely increase
HealthGate's cost of doing business and may adversely affect its results of
operations and the market price of the Company's common stock.
HEALTHGATE 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. HealthGate does not believe that its
publication and distribution of healthcare information online constitutes
practicing medicine. However, HealthGate cannot guarantee that one or more
states or other governmental bodies will not assert claims contrary to its
belief. Any claims of this nature could result in HealthGate spending a
significant amount of time and money to defend and dispose of them.
ITEM 2. PROPERTIES
HealthGate's principal executive and corporate offices and development and
network operations are located in Burlington, Massachusetts, in approximately
32,000 square feet of space occupied under a lease which expires in June 2005.
The Company is currently utilizing approximately 17,000 square feet of this
space and attempting to sublet the remaining 15,000 square feet. In addition to
the Burlington space, the Company's central computer facility is located at an
Exodus Communications, Inc. Internet Data Center in Waltham, Massachusetts. The
Company believes that current space is adequate.
19
ITEM 3. LEGAL PROCEEDINGS
In July 1999, the Company 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. There has been no recent
activity on this matter and at this time, HealthGate is unable to predict its
outcome.
In August 2000, HealthGate filed suit against Medical Self Care, Inc.
("SelfCare") in U.S. District Court in Boston, Massachusetts, seeking damages
due to SelfCare's breaches of an e-commerce/sponsorship agreement. The
litigation followed HealthGate's notice of termination of the agreement based on
SelfCare's failure to pay fees due under the agreement, and the filing of an
action by SelfCare against HealthGate in California state court seeking a
declaratory judgment that SelfCare was entitled to rescind the agreement and
that HealthGate was not entitled to terminate the agreement and was not entitled
to post-contract remedies. The lawsuit filed by SelfCare in California was later
dismissed.
On December 1, 2000, the rights and obligations of SelfCare were assumed by
Development Specialists, Inc. ("DSI"). HealthGate reached agreement with DSI in
February 2001 to settle HealthGate's litigation against SelfCare for a claim in
the liquidation of $5.25 million and a release of all of SelfCare's claims
against HealthGate. The Company is uncertain what amount, if any, it will
ultimately realize on this settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
HealthGate's Annual Meeting of Stockholders was held on October 5, 2000 in
Burlington, Massachusetts.
The vote to elect two persons as Class I Directors of HealthGate was as
follows:
NUMBER OF SHARES
-------------------------------
FOR WITHHELD AUTHORITY
---------- ------------------
David Friend.................................... 13,146,824 37,197
William G. Nelson............................... 13,146,824 37,197
Accordingly, Mr. Friend and Mr. Nelson were elected as Class I Directors to
serve for a three-year term until the 2003 Annual Meeting of Stockholders and
until their successors are elected and qualified. Class II Directors (Gerald E.
Bisbee, Jr., Jonathan J.G. Conibear and Chris H. Horgen) whose terms are
scheduled to expire at the 2001 Annual Meeting of Stockholders and Class III
Directors (Edson D. de Castro and William S. Reece) whose terms are scheduled to
expire at the 2002 Annual Meeting of Stockholders have terms as directors that
continued after the October 2000 Annual Meeting. Subsequently, effective
January 31, 2001, Mr. Horgen resigned as a Director and Thomas O. Pyle was
appointed a Class II Director.
The vote to approve an amendment to HealthGate's 1994 Stock Option Plan to
increase the number of shares issuable under the Plan from 3,599,997 to
4,480,000 was as follows:
For......................................................... 13,066,602
Against..................................................... 115,319
Abstain..................................................... 2,100
Accordingly, the amendment to HealthGate's 1994 Stock Option Plan was
approved.
20
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding HealthGate's
executive officers as of March 15, 2001.
NAME AGE POSITION
- ---- -------- --------
William S. Reece.......................... 35 Chairman of the Board of Directors,
President and Chief Executive Officer
Veronica Zsolcsak......................... 50 Chief Financial Officer and Treasurer
Rick Lawson............................... 41 Vice President of Business Development and
Secretary
WILLIAM S. REECE is a founder of HealthGate and has served as a member of
HealthGate's board of directors and as President and Chief Executive Officer
since the Company's inception in 1994. Mr. Reece has served as the Chairman of
the 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.
VERONICA ZSOLCSAK has served as HealthGate's Chief Financial Officer and
Treasurer since September 2000. From January 2000 to September 2000,
Ms. Zsolcsak was Chief Financial Officer and Treasurer of Infinium, Inc., a
provider of e-business solutions and an application service provider. During
1999, Ms Zsolcsak was Vice President of Operations at Renaissance
Worldwide, Inc., a global leader in business and technology consulting services
and from 1996 to 1998, Ms. Zsolcsak served as the Chief Financial Officer and
Treasurer of Town & Country Corporation.
RICK LAWSON is a founder of HealthGate and has served as the Company's
Secretary since 1994 and as Vice President of Business Development since October
2000. From November 1994 to October 2000 Mr. Lawson served as HealthGate's Vice
President of Content. 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.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
HealthGate's common stock is traded on the NASDAQ National Market under the
symbol "HGAT". The table below shows the range of high and low sales prices per
share for the shares of common stock on the NASDAQ National Market for the
calendar quarters indicated, as reported by NASDAQ. HealthGate's initial public
offering of common stock occurred on January 26, 2000. Therefore, no quoted
market prices for its common stock are available for any period prior to the
first quarter of 2000. Over-the-counter market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and do not necessarily
represent actual transactions.
2000 HIGH LOW
- ---- -------- --------
First Quarter.............................................. $12.875 $5.266
Second Quarter............................................. 7.250 1.500
Third Quarter.............................................. 2.250 0.938
Fourth Quarter............................................. 1.250 0.188
On March 26, 2000, the closing sale price of HealthGate's common stock, as
quoted on the NASDAQ National Market, was $0.3125 per share.
On December 8, 2000, HealthGate was notified by NASDAQ that it was no longer
in compliance with certain NASDAQ listing requirements, specifically
Rule 4450(a)(05) and that failure to correct these conditions on or before
March 8, 2001, could result in the delisting of the Company's stock. On
March 9, 2001, HealthGate was notified by NASDAQ of its intention to delist the
Company's stock. The Company has requested a hearing, which has been scheduled
for April 26, 2001, to appeal NASDAQ's delisting decision. The Company's stock
will continue to trade on NASDAQ until after a decision is rendered from the
hearing.
As of March 26, 2001, there were approximately 74 holders of record of
HealthGate's common stock. Because many of such shares are held by brokers and
other institutions on behalf of stockholders, the Company is unable to estimate
the total number of stockholders represented by these record holders. There are
no outstanding shares of HealthGate's preferred stock and, accordingly, no
market for said shares.
HealthGate has never declared or paid any cash dividends on its common stock
and does not anticipate paying cash dividends in the foreseeable future.
USE OF PROCEEDS
On January 31, 2000, HealthGate closed upon its initial public offering of
3,750,000 shares of its common stock. 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 funds from the initial public offering have been the principal source of
liquidity for HealthGate during the year ended December 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
HealthGate did not sell any unregistered securities during the fourth
quarter of 2000.
22
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with HealthGate's financial statements and the related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this report. The consolidated statement of
operations data for the years ended December 31, 1998, 1999, 2000 and the
consolidated balance sheet data as of December 31, 1999 and 2000, is derived
from and qualified by reference to the audited financial statements included
elsewhere in this filing. The consolidated statement of operations data for the
years ended December 31, 1996 and 1997, and the consolidated balance sheet data
as of December 31, 1996, 1997 and 1998, is derived from the Company's audited
financial statements that do not appear in this filing. The historical results
are not necessarily indicative of the results to be expected in the future.
YEAR ENDED DECEMBER 31,
------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Consolidated Statement of Operations Data:
Total revenue...................................... 408 1,285 2,434 3,242 10,553
Total costs and expenses........................... 3,120 3,820 4,975 19,532 57,206
------ ------ ------ ------- -------
Loss from operations............................... (2,712) (2,535) (2,541) (16,290) (46,653)
Net loss........................................... (2,726) (2,541) (2,878) (16,732) (49,533)
Net loss attributable to common stockholders....... (2,990) (3,081) (3,472) (25,469) (49,640)
Basic and diluted net loss per share attributable
to common stockholders........................... (0.66) (0.68) (0.76) (5.46) (2.96)
Shares used in computing basic and diluted net loss
per share attributable to common stockholders.... 4,543 4,543 4,548 4,662 16,782
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
Consolidated Balance Sheet Data:
Cash and cash equivalents............................ 1,156 29 961 579 4,594
Marketable securities................................ -- -- -- -- 10,305
Total assets......................................... 1,791 781 2,371 27,163 26,967
Long-term debt and capital lease obligations......... 79 17 3,655 1,957 220
Redeemable convertible preferred stock............... 4,763 6,295 6,889 15,627 0
Stockholders' equity................................. (3,740) (6,821) (9,735) 1,801 13,608
23
ITEM 7. 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 thereto. The following discussion
contains forward-looking statements that involve risks and uncertainties. Actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those discussed in
"Business--Risk Factors" and elsewhere in this report.
OVERVIEW
HealthGate provides content solutions to hospitals, healthcare institutions,
corporations and web sites, by leveraging web technology to supply up-to-date,
comprehensive content that is reliable, objective and credible for physicians
and other healthcare professionals, patients and health-conscious consumers.
HealthGate distributes its content through affiliated Web sites such as the
Company's CHOICE Web sites for hospitals and other institutions; other third
party co-branded Web sites and certain sections of the Health Channel of the
NBCi Web site.
HealthGate's management believes it has developed a scalable and sustainable
business model. The Company's limited operating history makes an evaluation of
the business and its prospects difficult. Investors should not use the Company's
past results as a basis to predict future performance. HealthGate has incurred
net losses since inception and had an accumulated deficit of approximately
$85.6 million as of December 31, 2000. The Company intends to continue to
develop new content. The Company plans to manage its expenses in line with its
revenue growth. However, HealthGate cannot assure investors that it will achieve
significant revenue or profitability or, if significant revenue or profitability
is achieved, that the Company will be able to sustain them.
At December 31, 2000, the Company had $14.9 million of cash and marketable
securities and $6.5 million of working capital. The Company has incurred
substantial losses and negative cash flows from operations in every fiscal year
since inception. In the years ended December 31, 1998, 1999 and 2000, the
Company incurred net losses of $2.9 million, $16.7 million and $49.5 million,
respectively, and negative cash flows from operations of $2.5 million,
$5.7 million and $21.5 million, respectively. Additionally, as of December 31,
2000, the Company had an accumulated deficit of $85.6 million.
In the fourth quarter of 2000 and the first quarter of 2001, the Company
took several actions to substantially reduce operating cash outflows. These
actions included reducing the Company's workforce in December 2000, amending the
Company's agreement with NBCi to significantly reduce required cash payments,
and amending or canceling several content arrangements. Further, if the Company
does not achieve its forecasted revenue levels in 2001, management is prepared
to implement additional cost reductions.
Based on the Company's current forecasted cash flows and its cash and
marketable securities on hand, the Company expects to have sufficient cash to
finance its operations through at least 2001. The Company's future beyond 2001
is dependent upon its ability to achieve break-even or positive cash flow, or
raise additional financing. There can be no assurances that the Company will be
able to do so.
REVENUE
The Company derives revenue primarily from services and, to a lesser extent,
from online advertising, sponsorship and e-commerce.
SERVICES REVENUE
Services revenue has been derived principally from development,
implementation and hosting fees associated with CHOICE Web sites, syndicating
the Company's content to third party Web sites and
24
activePress services. Revenue from CHOICE Web sites, content syndication and
activePress services is recognized ratably over the terms of the agreements
which generally range from one to three years.
HealthGate commercially introduced its CHOICE Web site product in early 1999
and in October 2000, the Company released its CHOICE 3.0 platform. As of
December 31, 2000, HealthGate had a contracted base of over 630 hospitals.
Under CHOICE Web site arrangements, HealthGate is generally paid an upfront
fee for developing, implementing and hosting a CHOICE Web site for a customer.
In addition, the arrangements provide the opportunity to place third party
advertising and sponsorship on the customer's CHOICE Web site. HealthGate
collects the fees for this advertising and sponsorship from the third party and
pays a commission to the customer. However, as part of an agreement with 14 of
the initial CHOICE customers, HealthGate guaranteed minimum advertising and
sponsorship commissions to these customers in amounts approximately equal to the
fees paid to HealthGate by the customer for the initial term of their CHOICE
agreements and, in a few cases, in amounts that exceed those fees. Once these
customers have paid the upfront fee to HealthGate or, if applicable, to an
authorized reseller, HealthGate is obligated to pay these guaranteed commissions
to the customer, generally on a quarterly basis, regardless of whether or not
any advertising or sponsorship has actually been sold on the CHOICE Web site.
HealthGate entered into these types of arrangements for promotional purposes to
establish the CHOICE Web site product but, beginning in July 1999, discontinued
the use of these arrangements as a standard practice.
Revenue from fees received for CHOICE Web site development, implementation
and hosting is recognized ratably over the term of the underlying agreement,
which generally ranges from one to three years. For those arrangements in which
there is guaranteed advertising and sponsorship commissions, HealthGate did not
recognize revenue unless the guaranteed commissions were less than the fees paid
to HealthGate. Instead, payments made by the Customer are treated as a customer
deposit. Any excess of fees paid over guaranteed commissions is recognized as
revenue ratably over the term of the agreement. If the advertising and
sponsorship commissions that was guaranteed to the customer exceeds the fees
paid to HealthGate, the excess is recorded as expense upon signing the
agreement. For arrangements in which the Company sells through a reseller, no
revenue is recognized until an agreement between HealthGate, the CHOICE customer
and the authorized reseller has been finalized and the CHOICE Web site has been
delivered. As advertising or sponsorship on these CHOICE Web sites is sold to
third parties, HealthGate will recognize advertising revenue from these CHOICE
Web sites.
In November 1999, HealthGate entered into a three-year development agreement
with Columbia Information Systems, Inc., a subsidiary of Columbia/HCA Healthcare
Corporation, to design, develop and maintain customized, co-branded CHOICE Web
sites for up to 280 Columbia/HCA hospitals and affiliates. The agreement
provides for an annual license fee of $3.5 million to be paid by Columbia
Information Systems for all products and services that HealthGate provides under
the agreement. The agreement can be terminated without cause by Columbia
Information Systems on June 1, 2001, upon payment of a $1.0 million termination
fee to HealthGate. The license fees are being recognized ratably over each
annual period.
ONLINE ADVERTISING, SPONSORSHIP AND E-COMMERCE
Advertising and sponsorship revenue has included revenue from banner
advertising and sponsorship of discrete portions of HealthGate's content
libraries. 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 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,
recognition of the corresponding revenue is deferred until the
25
guaranteed impressions are delivered. 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.
Prior to March 2000, advertising and sponsorship revenue also included
barter revenue, which represents an exchange of advertising space on
HealthGate's own Web sites for reciprocal advertising space on other Web sites.
Revenue from barter transactions is recognized during the period in which the
advertisements are displayed. Barter transactions are recorded at the fair value
of the advertisements provided. Barter expenses are recognized when HealthGate's
advertisements are run on the reciprocal Web sites, which is typically in the
same period during which the advertisements are run on HealthGate's Web sites.
Barter expenses are included in sales and marketing expenses. These barter
transactions have no impact on the Company's cash flows and, typically, no
significant impact on results of operations. Beginning in the first quarter of
fiscal 2000, HealthGate discontinued the practice of entering into revenue
generating barter transactions.
E-commerce revenue has been derived principally from individual user online
subscriptions and from transaction fees for fee-based access to portions of the
HealthGate 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.
In order to concentrate on the service aspect of its CHOICE, Syndication and
activePress businesses, the Company chose to phase out its advertising,
sponsorship and e-commerce operations in November 2000. HealthGate is currently
continuing to serve advertising promotions for certain advertisers in order to
fulfill their advertising orders and continues to use e-commerce to provide
full-text journals via the activePress service on a pay per view or transaction
fee basis.
In December 1999, HealthGate entered into an E-Commerce/Sponsorship
Agreement with Medical Self Care, Inc. ("SelfCare"), a seller of health-related
products and services. Under the agreement, HealthGate developed a co-branded
HealthGate/SelfCare Web site, and agreed to provide promotions for this
co-branded site over the 37-month term of the agreement. The agreement provided
for SelfCare to make annual cash payments to HealthGate of approximately
$1.0 million in the first year, $7.1 million in the second year and
$8.4 million in the third year. In addition, for the first year of services
under the agreement, SelfCare issued 996,348 shares of its Series H preferred
stock to HealthGate on February 2, 2000. HealthGate recorded these shares at a
value of approximately $3.5 million when received. HealthGate had been
recognizing revenue for the first year fees, including the value of preferred
stock received, ratably over the first annual period of the agreement.
In August 2000, HealthGate and SelfCare each filed litigation claims against
each other related to this agreement. See "Legal Proceedings." Due to the
uncertainty of this matter, HealthGate concluded that its investment in SelfCare
preferred stock was impaired and, accordingly, recorded a charge in the third
quarter of 2000 to write-off the carrying value of this investment.
Additionally, HealthGate suspended revenue recognition related to services
provided to SelfCare during the third quarter of 2000.
On December 1, 2000 the rights and obligations of SelfCare were assumed by
Development Specialists, Inc. ("DSI"). HealthGate reached agreement with DSI in
February 2001 to settle HealthGate's litigation against SelfCare for a claim in
liquidation of $5.25 million and a release of all of SelfCare's claims against
HealthGate. The Company is uncertain what amount, if any, it will ultimately
realize on this settlement and has not recognized any amount related to the
settlement in its financial statements. The Company's results of operations for
the year ended December 31, 2000 include revenue of $1.7 million related to this
agreement. The Company's balance sheet at December 31, 2000 includes net
deferred revenue of $2.0 million relating to SelfCare. This amount will be
recorded as other income at the time the Company determines what amount, if any,
will be realized on the liquidation of SelfCare.
26
NON-CASH EXPENSES
HealthGate recorded deferred compensation of $2.3 million in the year ended
December 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 three years. Of the total deferred compensation
amount, $0.3 million and $0.7 million was amortized in 2000 and 1999,
respectively, which was recorded as stock based compensation expense. In
addition, $41,000 was recorded for consultant stock options as stock based
compensation in 1999. During the years ended December 31, 2000 and 1999, options
to purchase shares of common stock, were forfeited without exercise, and the
related $503,000 and $611,000 of deferred compensation was reversed in 2000 and
1999, respectively. HealthGate currently expects to amortize the remaining
amounts of deferred compensation as of December 31, 2000 of $179,000 and $14,000
in 2001 and 2002, respectively.
In June 1999, HealthGate entered into a development and distribution
agreement with GE Medical Systems. Under the terms of this agreement, GE Medical
Systems may sell HealthGate's standard CHOICE Web site product and GE Medical
Systems' branded enhanced versions of HealthGate's CHOICE Web site product
through its worldwide sales force into its worldwide customer base of hospitals
and other patient care facilities. HealthGate believes that this agreement
benefits the Company through the association of the GE Medical Systems name with
HealthGate in general, and with the CHOICE product in particular, and through
the efforts of GE Medical Systems to distribute both the standard CHOICE product
and the GE Medical Systems enhanced versions of the CHOICE product. Therefore,
in connection with this agreement, in June 1999, HealthGate issued a warrant to
General Electric Company for the purchase of up to 1,189,800 shares of its
common stock. The warrant has a term of five years, was immediately exercisable
and had an original exercise price of $9.49 per share, which exercise price was
adjusted to $3.46 per share on January 1, 2000. The fair value of this warrant
was determined to be $10.3 million at the time of issuance using the
Black-Scholes option pricing model. This amount was recorded as marketing and
distribution rights, and was amortized on a straight-line basis over the one
year contractual term of the related development and distribution agreement. In
connection with the exercise price adjustment to $3.46 per share on January 1,
2000, the fair value of the warrant increased by approximately $1.2 million.
This incremental value was amortized over the remaining initial term of the
development and distribution agreement. During the years ended December 31, 2000
and 1999, amortization expense of $6.0 and $5.5 million, respectively, was
recorded. See "Business--Strategic Affiliations and Relationships--Marketing and
Distribution."
In November 1999, HealthGate entered into a separate three-year marketing
and reseller agreement with Columbia Information Systems under which Columbia
Information Systems agreed to endorse HealthGate as the preferred provider of
patient and consumer oriented health content for Web sites owned or operated by
HCA hospitals and affiliates. The agreement provides HealthGate, among other
things, the right to make a first offer to provide services for adding content
to the Columbia Information Systems' health portal site and any Web site owned
or operated by or affiliated with Columbia Information Systems or HCA. Further,
Columbia Information Systems may, for a commission, market and sell the CHOICE
Web site product to entities unaffiliated with HCA, subject to HealthGate's
approval. In connection with this agreement HealthGate issued a warrant to CIS
Holdings for the purchase of up to 1,941,035 shares of its common stock. The
warrant has a term of three years, an exercise price per share equal to the
initial public offering price of $11.00 and became exercisable in January 2000
upon HealthGate's initial public offering. The fair value of this warrant was
determined to be $13.5 million using the Black-Scholes option pricing model.
This amount was recorded as marketing and distribution rights, and is being
amortized on a straight-line basis over the three-year contractual term of the
related agreement. During the years ended December 31, 2000 and 1999, HealthGate
recorded amortization expense of $4.5 million and $0.8 million, respectively.
27
During the fourth quarter of 2000, as a result of recent events at the
Company and in its industry, HealthGate undertook an evaluation of its
intangible assets for potential impairment under SFAS 121 "Accounting for
Long-Lived Assets and Long-Lived Assets to be Disposed of." Based on this review
the Company determined that a write-down to the carrying value of its marketing
and distribution rights asset was appropriate. This conclusion was based on the
Company's continued operating losses and workforce reduction, and a modification
of its business model to expand focus beyond the hospital market. The Company
used a discounted cash flow model, applying a discount rate to projected net
cash flow relating to this marketing and distribution rights agreement through
its remaining term, and arrived at an estimated fair value for the asset of
approximately $1.3 million. The Company's results of operations for the year
ended December 31, 2000 include a charge of $6.9 million relating to this
impairment. This impairment assessment required certain significant estimates,
including estimated future cash flows associated with the marketing and reseller
agreement. The remaining asset amount of $1.3 million could be subject to
further impairment in the near term if future cash flows are less than
anticipated.
In October 1999, HealthGate entered into a three-year strategic alliance
agreement with Snap! LLC and Xoom.com, Inc. The rights of Snap! LLC and
Xoom.com, Inc. were subsequently assigned to NBC Internet, Inc. ("NBCi"). Under
the original agreement, NBCi was to provide various services to promote
HealthGate's name, the www.healthgate.com Web site, enterprise-based CHOICE Web
sites and the products and services HealthGate offers. In exchange for the
services provided to HealthGate by NBCi during the first year of the agreement,
HealthGate paid Snap a minimum cash fee of $10 million plus a $0.3 million
production and content integration fee, and in November 1999 HealthGate issued
to Snap 500,000 shares of its common stock. The value of these shares was
$4.5 million at the time of issuance, which was recorded as prepaid advertising.
The value of 250,000 shares was amortized as sales and marketing expense on a
straight-line basis in 2000, and the value of the other 250,000 shares was
recognized based on the delivery of advertising impressions in the first year of
the agreement. In September 2000, HealthGate amended this agreement. One of the
provisions of the revised agreement was that HealthGate agreed to redirect its
user traffic from www.healthgate.com to the Health Channel section of NBCi's
consumer Internet portal at www.nbci.com so that NBCi could count all user
traffic as part of its total user base.
In March 2001, HealthGate further amended its agreement with NBCi. Under the
amended agreement, HealthGate has issued a warrant to NBCi to purchase 200,000
shares of HealthGate common stock and will pay $2.1 million in cash in 2001 and
$2.8 million in cash in 2002, in return for being the anchor tenant on the men's
health, women's health and drugs and medications sections of the health channel
of the NBCi portal through October 2002 and sharing advertising and sponsorship
revenue derived from the co-branded www.healthgate.nbci.com Web site. The
agreement calls for HealthGate to continue to provide content to NBCi through
October 2004. If NBCi 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 NBCi 65% of all fees
payable under the remaining term of the amended agreement. See
"Business--Strategic Affiliations and Relationships--Marketing and
Distribution."
28
As part of the arrangement with NBCi, HealthGate receives a portion of the
advertising and sponsorship revenues appearing on the co-branded NBCi/HealthGate
portions of the NBCi Web site. To date these amounts have not been significant.
In February 2000, HealthGate repaid its long-term note payable, and charged
the remaining unamortized discount of approximately $476,000 to current period
earnings.
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 2000 WITH YEAR ENDED DECEMBER 31, 1999
REVENUE
Total revenue was $10.6 million for the year ended December 31, 2000
compared to $3.2 million for the year ended December 31, 1999, an increase of
$7.4 million or 226%. Services revenue for the year ended December 31, 2000
increased to $7.5 million from $2.3 million for the year ended December 31,
1999, due primarily to an increase in the revenue derived from CHOICE Web site
development, implementation and hosting. Advertising, sponsorship and e-commerce
revenue increased to $3.1 million in the year ended December 31, 2000 from
$0.9 million for the year ended December 31, 1999. Of this increase
$1.7 million related to HealthGate's e-commerce/sponsorship agreement with
SelfCare. See "Legal Proceedings." In the year ended December 31, 2000, three
customers represented 57% of total revenue, HCA (33%), Medical SelfCare (16%)
and Blackwell Science (8%). In the year ended December 31, 1999, two customers
represented 42% of total revenue, Blackwell Science (24%) and HCA (18%). Related
party revenue was $1.3 million for the year ended December 31, 2000, including
$0.8 million from Blackwell Science and $0.5 million from GE Medical Systems.
Because of the Company's decision in November 2000 to phase out its advertising,
sponsorship and e-commerce business, HealthGate expects that most of its future
near term revenue will be derived from its CHOICE, syndication and activePress
services.
COSTS AND EXPENSES
COST OF REVENUE. Cost of revenue consists primarily of costs involved with
providing Web services, royalties associated with licensed content, and related
equipment and software costs. Cost of revenue increased to $4.0 million in the
year ended December 31, 2000 from $2.3 million in the year ended December 31,
1999, due primarily to higher royalty expenses for licensed content and
depreciation on new equipment purchases to support the Company's increased
service offerings and increased revenue. As a percentage of total revenue, cost
of revenue decreased from 72% for the year ended December 31, 1999 to 38% for
the year ended December 31, 2000. This decrease was due in part to
renegotiations of several of the Company's content agreements. Because a large
number of the Company's content contracts have been renegotiated to fixed fee
contracts, HealthGate expects increases to costs of revenue to be minimal.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and related costs associated with the development and
support of the Company's Web-based service offerings. Research and development
expenses increased to $7.2 million for the year ended December 31, 2000 from
$4.6 million for the year ended December 31, 1999, due primarily to salaries and
related costs from the addition of technical and development personnel and
consultants. During 2000, software development costs of $0.7 million were
capitalized. These costs are being amortized on a straight-line basis over the
one-year life of the related software. The Company expects that it will
experience minimal increases during 2001 in its research and development
expenses due to scalability of its current product offerings and the institution
of cost controls.
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 $23.2 million in the year ended
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December 31, 2000 from $4.4 million in the year ended December 31, 1999. This
increase was primarily due to expenses of $14.6 million associated with the
Company's agreement with NBCi, which includes $4.5 million of non-cash
amortization charges associated with the shares of HealthGate common stock
issued to NBCi in November 1999. This increase was also due to higher salaries
and related costs associated with increased staffing to support the increased
volume in business. The Company expects that there will be decreases in sales
and marketing expenses in 2001 as a result of the revised NBCi agreement and
cost containment measures taken in the fourth quarter of 2000.
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 to $5.3 million in the year ended
December 31, 2000 from $2.0 million in the year ended December 31, 1999. This
increase was due primarily to salaries and related costs for newly hired
personnel, increased professional service fees, and costs associated with being
a public company. The Company expects that increases in general and
administrative expenses will be minimal in 2001 as a result of cost containment
measures taken in the fourth quarter of 2000.
MARKETING AND DISTRIBUTION RIGHTS AMORTIZATION. Non-cash amortization
expense of $6.0 million and $5.5 million was recorded in the years ended
December 31, 2000 and 1999, respectively, related to the warrant issued to GE
Medical Systems, Inc. in 1999. During the years ended December 31, 2000 and
1999, non-cash amortization expense of $4.5 million and $0.8 million,
respectively, was recorded in connection with the warrant issued to CIS in
November 1999.
IMPAIRMENT CHARGE FOR MARKETING AND DISTRIBUTION RIGHTS. As a result of
recent events at the Company and in its industry, HealthGate undertook an
evaluation of its intangible assets for potential impairment under SFAS 121
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of." Based on this review, the Company determined that a write-down to
the carrying value of its marketing and distribution rights asset was
appropriate. This conclusion was based on the Company's continued operating
losses and workforce reduction, and a modification of its business model to
expand focus beyond the hospital market. The Company used a discounted cash flow
model, applying a discount rate to projected net cash flow relating to this
marketing and distribution rights agreement through its remaining term and
arrived at an estimated fair value of $1.3 million. The Company's results of
operations for the year ended December 31, 2000 include an impairment charge of
$6.9 million relating to this impairment. This impairment assessment required
certain significant estimates, including estimated future cash flows associated
with this agreement. The remaining asset amount of $1.3 million could be subject
to further impairment in the near term if future cash flows are less than
anticipated.
UNAMORTIZED DEBT DISCOUNT WRITE-OFF. In February 2000, HealthGate repaid
its $2 million long-term note payable, and wrote off the remaining, unamortized
debt discount of approximately $0.5 million.
CHARGE FOR IMPAIRED INVESTMENT. During the third quarter of 2000 HealthGate
concluded that its investment in SelfCare preferred stock was impaired.
Accordingly, the Company recorded a charge of $3.5 million in the three months
ended September 30, 2000, to write-off the carrying value of this investment and
suspended further revenue recognition related to services provided to SelfCare.
INTEREST INCOME. Interest income for the year ended December 31, 2000 was
$1.3 million compared to $63,000 for the year ended December 31, 1999. This
improvement is the result of the Company's ability to maintain cash investments
in the current year with the proceeds received from the Company's initial public
offering and concurrent private placement in January 2000.
INTEREST EXPENSE. Interest expense for the year ended December 31, 2000 was
$167,000 compared to $498,000 for the year ended December 31, 1999. This
decrease is the result of the Company's ability to repay its long-term note
payable in January 2000.
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INCOME TAXES. As of December 31, 2000, HealthGate had net operating loss
carryforwards of approximately $16.5 million. HealthGate's net operating loss
carryforwards expire beginning in 2010. Certain future changes in the share
ownership of HealthGate, as defined in the U.S. Internal Revenue Code, 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, 1999 WITH YEAR ENDED DECEMBER 31, 1998
REVENUE
Total revenue was $3.2 million for the year ended December 31, 1999 compared
to $2.4 million for the year ended December 31, 1998, an increase of
$0.8 million or 33%. Services revenue for the year ended December 31, 1999
increased to $2.3 million from $1.5 million for the year ended December 31,
1998, due primarily to an increase in the revenue derived from co-branded CHOICE
Web sites for hospitals, including Columbia Information Systems, and other
enterprise clients. Advertising and sponsorship revenue remained approximately
the same, $0.7 million for the year ended December 31, 1999 as for the year
ended December 31, 1998. Advertising and sponsorship paid for with cash
increased by $0.4 million to $0.6 million in the year ended December 31, 1999
from $0.2 million in the year ended December 31, 1998. Revenue from barter
advertising arrangements for the year ended December 31, 1999 decreased
$0.4 million to $74,000 from the year ended December 31, 1998. This decrease was
due to HealthGate's continued reduction in emphasis on barter arrangements and
increased focus on selling advertising for cash. Beginning in the first quarter
of fiscal 2000 the Company discontinued the practice of entering into revenue
gen