HEALTHGATE DATA CORP - 10-K Annual Report

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

HealthGate Data Corp.
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		04-3220927 (IRS Employer Identification No.)
25 Corporate Drive, Suite 310, Burlington, Massachusetts (Address of principal executive offices)		01803 (Zip Code)

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.03 per share
(Title of class)

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 ý No o

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

The aggregate market value of the common stock held by persons other than affiliates of the registrant, as of March 18, 2002 was approximately $1.7 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 18, 2002 was 6,014,676.

Certain information in the registrant's definitive proxy statement to be filed with the Securities and Exchange Commission relating to the registrant's 2002 Annual Meeting of Shareholders is incorporated by reference into Part III.

This Annual Report on 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 revenues; HealthGate's ability to sell it products and services; HealthGate's ability to maintain a listing on Nasdaq; HealthGate's ability to develop and implement its Project Intellect™ strategic initiative; reliance on significant customers; unpredictability of quarter-to-quarter results; competition; reliance on content providers; computer systems and software; and HealthGate's ability to attract and retain key personnel. 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.

HealthGate Data Corp. ("HealthGate" or the "Company") is a market-leading provider and electronic publisher of healthcare information. HealthGate offers customers a comprehensive content repository of healthcare information. HealthGate's authoritative content has been chosen by more than 600 hospitals in the United States to provide the capability to drive down costs through clinician and patient education, more effective research, improved treatment and regulatory compliance. The Company's XML-based content can be delivered electronically to its customers or built into clinical software systems.

HealthGate currently generates revenue from licensing content on an individual resource basis and on a pre-packaged basis. During 2001, HealthGate began licensing portions of its content on an individual resource basis to customers that preferred to choose specific content elements. HealthGate's CHOICE Web site products consist of content and related services on a pre-packaged basis.

HealthGate is currently developing additional proprietary content. At December 31, 2001, 54% of the Company's content resources were proprietary to HealthGate. This content includes information that will be tagged using the most popular medical coding vocabularies, including ICD-9-CM and SNOMED. The Company anticipates marketing this content to healthcare institutions and related healthcare organizations for use in a variety of clinical systems.

HealthGate has registered the trademarks "HealthGate," "HealthGate Data", "CHOICE," "MedGate," "ReADER," "activePress" and the HealthGate logo in the United States. On February 12, 2002, HealthGate acquired the U.S. registered trademark "The Natural Pharmacist" and the application for the trademark "TNP.com" in the United States. All other trademarks, service marks or trade names referred to in this Report are the property of their respective owners.

During 2001, HealthGate focused its business on being a provider and electronic publisher of healthcare content. HealthGate currently provides content in two different ways, (1) individual resource and (2) pre-packaged content, including CHOICE products and services. HealthGate is also developing the Project Intellect strategic initiative, which the Company expects to start offering to customers in 2002.

Individual Resource. Licensing content from HealthGate on an individual resource basis allows HealthGate's customers to select only those content resources and databases that are desired for that customer's purposes or constituency. For example, a hospital whose primary clientele is children may select resources focusing on pediatric content.

Pre-Packaged Content. Licensing pre-packaged content, such as HealthGate's CHOICE products and services, offers clients a generalized selection of HealthGate's more popular content resources. These packages include hosting and Web development services.

Both individual resource and pre-packaged content are marketed to hospitals, pharmaceutical companies, payors and other healthcare companies, and delivered over the Internet with the content being hosted on HealthGate's servers.

HealthGate's content is customized and delivered so that it appears as a seamless component of the client's existing application. HealthGate has developed a number of templates from which it is able to conform the design with the enterprise's own application. Using a standard format for the content and developing flexible templates has made it possible for HealthGate to generally deliver content to a client in one to two business days of signing an agreement.

Project Intellect. In 2000, HealthGate began the Project Intellect strategic 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 its content directly with existing healthcare applications, services and information. This would have applicability in areas such as appointment scheduling, billing and reimbursement inquiries, delivery of clinical results and receipt of prescriptions. The Company believes that Project Intellect products and services will strengthen HealthGate's existing business and grow the Company's business as a provider to healthcare suppliers. In December 2001, HealthGate entered into a beta agreement for Project Intellect with HCA—Information Technology & Services, Inc. ("HCA-Information"), formerly known as Columbia Information Systems, Inc., a subsidiary of HCA, Inc., formerly known as Columbia/HCA Healthcare Corporation.

The Company believes it offers healthcare professionals, patients and consumers one of the most reliable, objective, comprehensive and up-to-date collections of health and medical information available. HealthGate's content totals more than 30 distinct content resources, such as eleven Healthy Living Centers, Conditions and Concerns, Journal Notes and RXChecker. These content resources are compiled by HealthGate from a multitude 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.

HealthGate currently builds its online content repository in three ways: (1) developing proprietary in-house content; (2) acquiring copyrights to content from third parties and adding value by further revising the content in-house; and (3) licensing content from healthcare and medical information providers.

Healthy Living Centers. Healthy Living Centers feature magazine-style articles on health topics that affect people throughout the life cycle. These eleven electronic consumer health centers are:

The Natural Pharmacist ("TNP"). TNP is a comprehensive evidence-based collection of alternative and natural health content for both consumers and healthcare professionals. TNP relies on well-documented research, based on the latest clinical and research studies, to provide information that is trustworthy and reliable. A key feature differentiating TNP from other natural health content providers is its comprehensive information on herbal and traditional drug interactions.

Diagnostic and Surgical Procedures ("DSP"). DSP includes 700-word fact sheets that describe approximately 150 of the most the most frequently performed surgical tests and procedures in the United States, as determined by the Agency for Healthcare Research and Quality. This content covers topics ranging from abdominal surgery to ultrasound and is written with a reading level of grade 8 or lower according to the Flesch-Kincaid Grade Level score. These fact sheets are reviewed quarterly, dated and referenced. During 2001, the Company introduced Spanish versions of many of these fact sheets. HealthGate plans to have the entire collection available in Spanish and English by the end of 2002.

Diseases, Conditions and Injuries ("DCI"). DCI includes 700-word fact sheets that describe more than 450 common diseases, conditions and injuries. This content covers topics ranging from acne to wrist sprains with a reading level of grade 8 or lower according to the Flesch-Kincaid Grade Level score. These fact sheets are reviewed quarterly, dated and referenced. During 2001, the Company introduced Spanish versions of many of these fact sheets. HealthGate plans to have the entire collection available in Spanish and English by the end of 2002.

Consumer Health Guides. These guides are collections of fact sheets related to conditions and procedures specific to one topic or population. Categories include: women, men, parents, seniors, sports and fitness, mental health and sexuality. HealthGate also offers a guide in Spanish.

Conditions and Concerns. This content resource includes information on more than 400 topic areas ranging from allergies to weight management. Additionally 50 "super centers" include relevant information from a variety of health resources, including government agencies, clinical practice guidelines and support groups.

Anatomy Explorer and Condition Explorer. The Anatomy Explorer allows for interactive exploration of the body by system. The Condition Explorer links to appropriate fact sheets from other proprietary resources.

Health Living Calculators. This content resource consists of four interactive tools designed to help consumers assess body mass index, waist to hip ratio, calories burned and an activities calculator.

Journal Notes. This content resource includes articles written for the consumer explaining the latest break-through research as published in a broad array of international medical journals.

Content in the HealthGate repository is written by health and medical professionals who are physicians, dentists, nurses, nurse practitioners, registered dietitians or certified athletic trainers or written by experienced medical journalists. All HealthGate writers must meet the rigorous qualifications set by the HealthGate editorial department. HealthGate's evidence-based health information reflects national clinical practice guidelines and undergoes a detailed, multi-layered review before it reaches customers. New content undergoes an initial review by HealthGate's editorial staff and is then sent on for medical review. HealthGate's medical review board is comprised of physicians affiliated with pre-eminent academic institutions such as Harvard University School of Medicine, Boston University School of Medicine, Massachusetts General Hospital, Dana Farber Cancer Institute and the Tufts University School of Medicine. Content is reviewed based on reviewers' individual medical specialties. In addition, existing content is reviewed by the HealthGate editorial staff on a scheduled basis and is sent out for appropriate medical or professional review.

This category includes well-known, independent and authoritative health and medical content licensed by HealthGate for distribution to its customers. 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:

All licensed content must meet certain criteria prior to being added to HealthGate's content repository, including the evaluation of the content provider's own review process, comparison with comparable sources and the frequency of updates.

In order to focus on being a provider and electronic publisher of healthcare information, HealthGate chose to phase out some of the other products and services that it had previously offered. These former products and services included: (1) use of the HealthGate Web site as a consumer portal; (2) advertising and sponsorship; (3) the NBCi Web portal alliance and (4) activePress service for publishers.

In order to concentrate on its content sales and service offerings, 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.

In order to concentrate on its content sales and service offerings, HealthGate chose to phase out its advertising, sponsorship and e-commerce products in November 2000.

During 2000 and 2001, the Company provided access to selected portions of its content libraries to users of NBC Internet Inc.'s ("NBCi") Web portal site, www.nbci.com. Beginning in March 2000, HealthGate was the anchor tenant, or most prominent provider of healthcare information, for certain areas of NBCi's Health Channel on the Web portal site. In June 2001, HealthGate negotiated an end to its contract with NBCi. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."

HealthGate's activePress service, which was launched in 1998, offered a full service Web-based solution to publishers and other parties that wanted to offer Web-based access to print materials or databases. The Company converted and offered online approximately 300 peer reviewed journal titles covered by the initial agreement with Blackwell Science. As part of this service, HealthGate made 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 included storing, maintaining and updating 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 site, HealthGate had the right to syndicate these journals to its other customers and share in fees for each online subscriber to a Blackwell journal as well as transactional fees for each Blackwell journal article purchased with Blackwell Science. HealthGate's agreement with Blackwell Science terminated in January 2002. HealthGate no longer provides activePress services for publishers.

HealthGate primarily sells its products and services through its own direct sales force. The direct sales force is divided into five direct sales regions for hospital, payor and other, non-hospital sales. Each region is assigned a direct sales representative. The sales group is supported by an account management group, that is responsible for facilitating the entire sales process, identifying leads through telemarketing and supporting customers. The account management group's support functions include customer service, serving as technical contact for the client, maintenance of customer and prospect databases, online demonstration sessions, preparation of presentations and proposals and development of relationships with current and future clients.

Although substantially all of HealthGate's revenues are generated by its own sales force, HealthGate has utilized resellers and distributors for its products and services. In June 1999, HealthGate entered into a development agreement with GE Medical Systems ("GEMS") pursuant to which GEMS is able to sell the CHOICE products and GEMS branded enhanced versions of the CHOICE product through its sales force and into its customer base of hospitals and other patient care facilities. In November 1999, HealthGate entered into a three-year marketing and reseller agreement with HCA-Information. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."

HealthGate is committed to providing a high level of service and support to its customers and users through an account management group. The Company believes that customer service is important to its ability to attract and retain customers and users.

Each customer works with a specific contact within HealthGate's account management group. The account manager is responsible for assisting the customer in integrating content licensed from HealthGate into the customer's site. After successful integration, the account manager assists the customer with all day-to-day issues involving content licensed from HealthGate. The account manager regularly contacts customers to answer questions, report on outstanding issues and provide updates on the availability of new content and services. The account manager also serves as the customer's technical contact within the Company.

Depending on the contractual relationship with the customer, account management may answer questions posed by users on the customer's web site via e-mail or via a toll-free number. In addition to e-mail and a telephone support number, online help screens are available to assist users when they access HealthGate's content.

The Company's technology consists of internally developed and commercially available software programs. All of HealthGate's hosted 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, Extensible Markup Language ("XML"), Extensible Style Language ("XSL") and relational databases. Scalability and stability of the platform is achieved through load-balancing and redundancy of 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.

The Content Normalization module converts original content, regardless of format supplied by the content provider, into a single, consistent 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 us to offer, through Content Delivery, multiple product offerings with different features, while using the same content from the same repository.

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 such as ICD-9-CM and SNOMED. 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.

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 customer Web site and access point. The utilization of XSL allows for quick and efficient formatting modifications. For example, XSL converts or transforms information stored in XML into other data formats, such as Hypertext Markup Language (HTML), used to construct most Web pages. This module gives us the option of having multiple product offerings with different features, while using the same content from the same repository.

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, our competitors include the following types of companies:

Some of HealthGate's competitors may enjoy 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," below.

Currently, there are a number of laws that regulate communications or commerce on the Internet. Federal, state, local and foreign governments and agencies are considering laws and regulations that address issues such as user privacy, pricing, online content regulation, taxation and the characteristics and quality of online products and services. In addition, several telecommunications carriers have petitioned the Federal Communications Commission to regulate Internet service providers and online service providers in a manner similar to long distance telephone carriers and to impose access fees on these providers. Regulation of this type, if imposed, could substantially increase the cost of communicating on the Internet.

Internet user privacy has become an issue both in the United States and abroad. 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 products and services or otherwise materially adversely affect the Company's business. See "—Risk Factors," below.

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 a significant portion of its content from third parties. Under most of these 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," below.

As of December 31, 2001, HealthGate had a total of 53 full-time employees. Of these employees 24 serve in research and development, 18 in administration and 11 serve in sales and marketing. The completion of certain development projects and productivity improvements enabled the Company to reduce certain members of its support and development staff in January 2002. After the reduction in force, the Company has approximately 45 full-time employees. None of HealthGate's employees is represented by a labor union. The Company considers its relationship with its employees to be good.

HealthGate's business involves significant risks and uncertainties. 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.

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, 2001, the Company had $8,589,000 of cash and cash equivalents and $2,661,000 of working capital. The Company has incurred substantial losses and negative cash flows from operations in every fiscal period since inception. For the year ended December 31, 2001, the Company incurred a net loss of $8,160,000 and negative cash flow from operations of $5,380,000. The Company had an accumulated deficit of $93,731,000 at December 31, 2001.

In the fourth quarter of 2000 and throughout 2001, HealthGate took numerous actions to substantially reduce operating cash outflows. These actions included workforce reductions, terminating the Company's agreement with NBCi and amending or canceling several content arrangements. Many of these cost savings were made possible through process improvements, development of additional proprietary content and focusing on content sales and services. If the Company does not achieve its forecasted revenue levels in the future, 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 for at least the next twelve months. The Company's future beyond the next twelve months is dependent on its ability to maintain 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 content service offerings, and continued cost containment. 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 its content products and services. HealthGate's products and services include licensing content on both an individual resource basis and on a pre-packaged basis. HealthGate licenses access to portions of its content on an individual content resource basis to customers that preferred to choose specific content resources. HealthGate sells its CHOICE Web site products consisting of content and related services on a pre-packaged basis.

A key element of the Company's strategy is to continue to increase sales and licensing into the hospital market as well as to expand sales and licensing into other healthcare markets, such as payors and pharmaceutical companies. If HealthGate is unable to increase sales and licensing, the Company's business prospects, results of operations and the market price of the Company's common stock could be materially adversely affected.

Failure to regain compliance with the listing requirements for Nasdaq could result in the Company's stock being delisted which may adversely affect the market price of HealthGate's stock in a manner unrelated to the Company's performance. HealthGate's common stock is presently listed on the Nasdaq National Market. Beginning in 2000 there have been periods of time during which HealthGate has been out of compliance with one or both of the $5.0 million market value of public float and $1.00 minimum bid requirements of the Nasdaq National Market. HealthGate has been out of compliance with both listing requirements since August 2001. In December 2000, HealthGate was notified by Nasdaq that it was not in compliance with these listing requirements. HealthGate was granted a hearing on April 26, 2001 and while the final determination of hearing was pending, HealthGate's common stock remained listed on the Nasdaq National Market. In connection with Nasdaq's October 2001 suspension of minimum bid price and market value of public float requirements until January 2, 2002, the Nasdaq Listing Qualifications Panel determined to continue the listing of HealthGate's common stock on the Nasdaq National Market. On February 14, 2002, HealthGate was notified by Nasdaq that it was not in compliance with both the $5.0 million market value of public float and $1.00 minimum bid requirements of the Nasdaq National Market. Nasdaq is allowing HealthGate through May 15, 2002 to regain compliance. If HealthGate is not in compliance with Nasdaq National Market listing requirements on that date, Nasdaq staff may notify HealthGate of a determination to delist the stock. If an initial delisting decision is made by the staff, HealthGate may appeal the decision as permitted by Nasdaq rules. Nasdaq also stated that HealthGate may apply to transfer its securities to the Nasdaq SmallCap Market before May 15, 2002 for which there is a $1.0 million market value of public float requirement and a grace period through August 13, 2002 to comply with the Nasdaq SmallCap Market's $1.00 minimum bid price requirement. The Company cannot predict whether it will regain compliance with Nasdaq National Market listing requirements, whether it will be listed on the Nasdaq SmallCap Market and be able to remain listed on the Nasdaq SmallCap Market, or what effect a delisting from the Nasdaq National Market or the Nasdaq SmallCap Market would have on the market price of the Company's stock.

HealthGate's business prospects may suffer if the Company is not able to keep up with the rapid technological developments in the electronic healthcare content industry. The electronic healthcare content 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, in addition to maintaining the depth and breadth of its content repository, 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 electronic healthcare content 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's ability to develop and implement its Project Intellect 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 and tools necessary to efficiently add the vocabularies to its content repository nor can it be assumed that HealthGate can effectively market this new initiative beyond its current customer market. If HealthGate is unsuccessful at either, then the future success of the Company may be affected.

A significant portion 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 unless the Company finds other significant customers. Historically, HealthGate has generated a substantial portion of its revenue from a few customers. For the year ended December 31, 2001, three customers, HCA-Information (an affiliate of a HealthGate warrant holder), Blackwell Science (a stockholder), and GEMS (an affiliate of a stockholder and a warrant holder) accounted for 21%, 17% and 9%, respectively, of the Company's total revenue.

In March 2001, HealthGate and HCA-Information amended their Co-Branded CHOICE Web Site Agreement. The original agreement initially provided for annual license fees of $3,500,000 to be paid by HCA-Information to HealthGate. The amendment significantly reduced the content that is available on the customized HCA-Information CHOICE Web sites, increased the maximum number of hospitals covered to 330 and eliminated HCA-Information's option to terminate the Agreement on June 1, 2001. The term of the amended agreement is from March 2001 to November 2002 and calls for HCA-Information to pay license fees to HealthGate of $1,417,000 in both 2001 and 2002. HealthGate expects to continue to generate a substantial portion of its revenue in the near future from HCA-Information. In December 2001, HealthGate entered into a beta agreement for Project Intellect with HCA-Information.

HealthGate's agreement with GEMS, as amended, runs through June 2002. Revenues derived under this agreement for the year ended December 31, 2001 were $865,000. Substantially all of this revenue was recognized in the first six months of 2001 and no significant revenue is expected in 2002. Additionally, HealthGate's agreement with Blackwell Science terminated on January 31, 2002. HealthGate will not derive significant revenue from Blackwell Science in 2002. The loss of HCA-Information as a customer or HealthGate's failure to obtain other significant customers and sources of revenues to replace the revenue previously derived from Blackwell Science and GEMS could adversely affect the Company's business.

HealthGate's quarterly operating results may fluctuate, which could affect the market price of HealthGate's common stock in a manner unrelated to the Company's long-term performance. The Company's quarterly revenue, expenses and operating results may fluctuate 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:

Although HealthGate does not plan a major increase in spending related to operations, the expense levels are in part based on the Company's expectations concerning future revenue and these expense levels are predominately fixed in the short-term. If the Company has lower revenue than expected, HealthGate may not be able to reduce spending in the short-term in response. Any shortfall in revenue would have a direct impact in HealthGate's results of operations. In this event, the price of the Company's common stock may fall.

HealthGate faces intense competition in licensing its electronic healthcare information products and services and may not be able to compete effectively. The market for healthcare content products and services provided electronically is relatively new, intensely competitive and rapidly changing. With only moderate barriers to entry in a rapidly evolving industry, there are now thousands of content providers offering users healthcare content, products and services, and the Company expects that competition will continue to grow. HealthGate competes, directly and indirectly, for customers, consumers, content and service providers, and acquisition candidates with other electronic healthcare content companies. Some of the Company's competitors may enjoy 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. HealthGate experienced one minor unscheduled service interruption of approximately four hours in 1998. In April 2001, HealthGate's activePress service experienced an unscheduled service interruption of approximately six hours. 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. In September 2001, Exodus filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code and in December 2001 was purchased by Cable and Wireless. 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, neither Exodus nor Cable & Wireless guarantees 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's business prospects may suffer if it is not able to successfully retain key personnel. HealthGate has grown from three employees at the end of 1994 to 45 employees as of January 31, 2002. HealthGate's future success depends on the Company's ability to retain, train, motivate, identify, attract, and hire highly skilled technical, managerial, editorial, sales and customer service personnel. Competition for highly skilled personnel is intense. In particular, skilled employees are highly sought after in the Boston area, and the Company cannot guarantee that it will be able to retain or attract these employees.

HealthGate may be subject to liability for information retrieved from the Company's content repository. 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. 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 content repository or client Web sites. For example, claims could be made against HealthGate if material deemed inappropriate for viewing by children could be accessed through its Web site or if a professional, patient or consumer relies on healthcare information accessed through HealthGate 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. HealthGate licenses a significant portion 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. 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. 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.

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," "activePress," and its HealthGate logo trademarks in the United States. On February 12, 2002, HealthGate acquired the U.S. registered trademark for "The Natural Pharmacist" along with the trademark registration for "TNP.com". 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, induces users to infringe 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.

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 computer network 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 associated with protecting an individual's medical records or other personal identifying information could adversely affect HealthGate's business. User privacy has become an issue both in the United States and abroad. The United States Department of Health and Human Services has recently implemented regulations to protect the privacy of individuals' medical records and health information that may affect the way HealthGate currently does business. Other government agencies have been investigating certain companies regarding their use of their users' personal information. In addition, the European Union (EU) has adopted a directive that imposes restrictions on how companies may use personal data of citizens of EU member states. HealthGate cannot make assurances that current or future regulations imposed domestically or overseas will not adversely affect the Company's business.

As part of the Company's agreements with a few content suppliers, HealthGate maintains a limited amount of confidential information about those users who access certain content sources, such as the user's name, e-mail address and gender. HealthGate has a stringent privacy policy covering this information and maintains facilities and infrastructure designed to keep this information secure. However, a material security breach could damage our reputation or result in liability to the Company. HealthGate could also become liable if confidential information is disclosed inappropriately. Any such action 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 HealthGate. 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 HealthGate to additional state sales, income and other taxes. In November 2001, the federal law that placed a temporary moratorium on certain types of taxation on Internet commerce was extended through November 2003. 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. 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 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.

HealthGate's principal executive and corporate offices along with development and network operations are located in Burlington, Massachusetts, under a lease for approximately 32,000 square feet of space, which expires in June 2005. The Company is currently utilizing approximately 12,000 square feet of this space. During the fourth quarter of 2001, HealthGate committed to an exit plan to vacate certain excess space at its headquarters building and in February 2002, the Company began subleasing a portion of its excess space. In addition to the Burlington space, the Company's central computer facility is located at an Exodus Internet Data Center in Waltham, Massachusetts. The Company believes that current space is adequate.

In July 1999, HealthGate received a letter alleging that HealthGate's Web site induces users to infringe a patent held by a company (the "Holder"). In lieu of pursuing a patent infringement claim against HealthGate, the Holder offered to provide HealthGate with a license for unlimited use of the patent for a one-time payment of between $50,000 and $150,000. There has been no recent activity on this matter and at this time, HealthGate is unable to predict its outcome.

The following table sets forth certain information regarding HealthGate's executive officers as of March 18, 2002.

NAME	AGE	POSITION
William S. Reece	36	Chairman of the Board of Directors, President and Chief Executive Officer
Veronica Zsolcsak	51	Chief Financial Officer and Treasurer
Rick Lawson	42	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 1988 to 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. Previous to her joining HealthGate, from January 2000 to September 2000, Ms. Zsolcsak was Chief Financial Officer of Infinium, Inc. a provider of financial software applications. During 1999, Ms Zsolcsak served as Vice President of Operations for Renaissance Worldwide, Inc., a business and technology consulting services company. From 1996 to 1998 Ms. Zsolcsak was Chief Financial Officer of Town & Country Corporation. She has also served as Chief Financial Officer and Vice President of Finance at DRI/McGraw-Hill (1990 to 1993) and held senior financial positions at Wang (1982-1990) and Digital Equipment Corporation (1977 to 1982).

RICK LAWSON is a founder of HealthGate and has served as a Vice President and Secretary since 1994. From 1987 to 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.

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 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 and adjusted to reflect the July 1, 2001, 3-for-1 reverse stock split. 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	$	38.629	$	15.798
Second Quarter	$	21.752	$	4.500
Third Quarter	$	6.751	$	2.183
Fourth Quarter	$	3.750	$	0.563

2001	HIGH		LOW
First Quarter	$	2.063	$	0.469
Second Quarter	$	2.610	$	0.600
Third Quarter	$	1.200	$	0.250
Fourth Quarter	$	0.770	$	0.300

On March 18, 2002 the closing sale price of HealthGate's common stock, as quoted on the NASDAQ National Market, was $0.580 per share.

On February 14, 2002, HealthGate was notified by Nasdaq that it was not in compliance with both the $5.0 million market value of public float and $1.00 minimum bid requirements of the Nasdaq National Market. Nasdaq is allowing HealthGate through May 15, 2002 to regain compliance. If HealthGate is not in compliance with Nasdaq National Market listing requirements on that date, Nasdaq staff may notify HealthGate of a determination to delist the stock. If an initial delisting decision is made by the staff, HealthGate may appeal the decision as permitted by Nasdaq rules. Nasdaq also stated that HealthGate may apply to transfer its securities to the Nasdaq SmallCap Market before May 15, 2002 for which there is a $1.0 million market value of public float requirement and a grace period through August 13, 2002 to comply with the Nasdaq SmallCap Market's $1.00 minimum bid price requirement. The Company cannot predict whether it will regain compliance with Nasdaq National Market listing requirements, whether it will be listed on the Nasdaq SmallCap Market and be able to remain listed on the Nasdaq SmallCap Market. See "Business—Risk Factors—Failure to regain compliance with the listing requirements for Nasdaq could result in the Company's stock being delisted which may adversely affect the market price of HealthGate's stock in a manner unrelated to the Company's performance."

On March 18, 2002 there were 48 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 accurately estimate the total number of stockholders represented by these record holders.

HealthGate has never declared or paid any cash dividends on its common stock or other securities and does not anticipate paying cash dividends in the foreseeable future.

HealthGate did not sell any unregistered securities during the fourth quarter ended December 31, 2001.

On January 31, 2000, HealthGate closed upon its initial public offering of 1,250,000 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, 2001 and were used to fund operating losses and make capital expenditures as described in the financial statements included in this report. Other proceeds from the offering have been invested in interest-bearing, investment grade securities.

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, 1999, 2000, 2001 and the consolidated balance sheet data as of December 31, 2000 and 2001, 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, 1997 and 1998, and the consolidated balance sheet data as of December 31, 1997, 1998 and 1999, 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.

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.

On February 12, 2002, HealthGate acquired from Random House, Inc. the assets of The Natural Pharmacist ("TNP"), a publisher of comprehensive evidenced-based alternative and natural health content for consumers and healthcare professionals. HealthGate paid approximately $350,000 in cash to acquire the assets of TNP, consisting primarily of complementary and alternative health content and trademarks. HealthGate will be applying the purchase accounting provisions of Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141") in recording this transaction.

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. The Company intends to continue to invest in its content repository. 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, 2001, the Company had $8,589,000 of cash and cash equivalents and $2,661,000 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, 1999, 2000 and 2001, the Company incurred net losses of $16,732,000, $49,534,000 and $8,160,000, respectively, and negative cash flows from operations of $5,729,000, $21,482,000 and $5,380,000, respectively. Additionally, as of December 31, 2001, the Company had an accumulated deficit of $93,731,000.

In the fourth quarter of 2000 and throughout 2001, the Company took numerous actions to substantially reduce operating cash outflows. These actions included workforce reductions, terminating the Company's agreement with NBC, Internet, Inc. ("NBCi"), and amending or canceling several content arrangements. As a result, the Company achieved positive cash flows from operations during the fourth quarter of 2001. If the Company does not achieve its forecasted revenue levels in the future, management is prepared to implement additional cost reductions.

Based on HealthGate's forecasted cash flows and its cash and cash equivalents on hand, the Company expects to have sufficient cash to finance its operations through 2002. The Company's future beyond 2002 is dependent upon its ability to maintain break-even or positive cash flow, or raise additional financing. There can be no assurances that the Company will be able to do so.

HealthGate's discussion and analysis of its financial condition and results of operations are based upon HealthGate's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. HealthGate

evaluates its estimates on an on-going basis. HealthGate bases its estimates on assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The following critical accounting policies and significant judgments and estimates were used in the preparation of HealthGate's consolidated financial statements:

Revenue Recognition. HealthGate primarily derives revenue from licensing access to its content repository and other content services, including Web site development and hosting arrangements such as CHOICE® Web sites. As of December 31, 2001, HealthGate had a contracted base of 637 hospitals. HealthGate has also generated revenue from providing activePress™ services, online advertising, sponsorships and e-commerce, including user subscription and transaction based fees. In order to focus on being a provider and electronic publisher of healthcare information, HealthGate chose to phase out its advertising, sponsorship and e-commerce offerings in November 2000. Accordingly, there is limited revenue from these activities in 2001. HealthGate's activePress agreement with Blackwell Science terminated in January 2002. HealthGate no longer provides activePress services.

HealthGate commercially introduced its CHOICE Web site product in early 1999 and in October 2000, the Company released its CHOICE 3.0 platform. 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 provided 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 14 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. HealthGate no longer offers advertising guarantees to its customers. As of December 31, 2001, there were six of these arrangements still in effect.

HealthGate records revenue in accordance with Staff Accounting Bulletin No. 101 ("SAB 101"). Revenue from services arrangements is recognized ratably over the terms of the underlying agreement between HealthGate, the customer, and if applicable, HealthGate's authorized reseller, which generally ranges from one to three years. HealthGate typically does business with its customers using standard contracts and does not begin to recognize revenue until such contract is signed by both parties. For any arrangement in which HealthGate guarantees advertising commissions to the customer, HealthGate records fees paid by the customer as a customer deposit, up to the amount of the applicable guarantee. Payments made to customers under these guarantees are recorded as reductions of the related customer deposit. The excess of the fee paid by the customer to HealthGate over guaranteed advertising and sponsorship commissions, if any, is recognized as revenue ratably over the term of the underlying agreement. For those arrangements in which HealthGate guarantees advertising and sponsorship commissions in excess of the fees paid by the customer, the excess is recorded as expense upon signing the agreement. For arrangements in which HealthGate sells through a reseller, HealthGate does not recognize any revenue until an agreement has been finalized between HealthGate, its customer, and its authorized reseller, and the content has been delivered. Revenue is not recognized in any circumstances unless collectability is deemed probable.

In November 1999, HealthGate entered into a three year development agreement with Columbia Information Systems, Inc., now known as HCA-Information Technology & Services, Inc. ("HCA-Information"), a subsidiary of HCA, Inc., formerly known as Columbia/HCA Healthcare Corporation ("HCA"), to design, develop and maintain customized, co-branded CHOICE Web sites for up to 280 HCA hospitals and affiliates. The agreement provided for an annual license fee of $3,500,000 to be paid by HCA-Information for all products and services that HealthGate provides under the agreement. The agreement could be terminated without cause by HCA-Information on June 1, 2001, upon payment of a $1,000,000 termination fee to HealthGate. HealthGate began delivering customized co-branded CHOICE Web sites pursuant to this agreement in December 1999. As of December 31, 2001, the Company had delivered 276 customized co-branded CHOICE Web sites to HCA hospitals.

In March 2001, HealthGate and HCA-Information amended the development agreement. The term of the amended agreement is from March 2001 to November 2002 and calls for HCA-Information to pay license fees to HealthGate of approximately $1,417,000 in both 2001 and 2002. The amendment significantly reduces the content that will be made available on the customized HCA-Information CHOICE Web sites, increases the maximum number of hospitals covered to 330 and eliminates HCA-Information's option to terminate the Agreement on June 1, 2001. In 2001, HealthGate received approximately $583,000 in license fees under the original agreement. The annual license fees from this agreement are recognized rat

PART I
Item 1.	Business	3
Item 2.	Properties	17
Item 3.	Legal Proceedings	17
Item 4	Submission of Matters to a Vote of Security Holders	17
	Executive Officers of the Registrant	18
PART II
Item 5.	Market for Registrant's Common Stock and Related Stockholder Matters	19
Item 6.	Selected Consolidated Financial Data	20
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	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	35
Item 11.	Executive Compensation	35
Item 12.	Security Ownership of Certain Beneficial Owners and Management	35
Item 13.	Certain Relationships and Related Transactions	35
PART IV
Item 14.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	36
Signatures		40
Financial Statements		F-1

	Year ended December 31,
	1997			1998			1999			2000			2001
	(in thousands, except per share data)
Consolidated Statement of Operations Data:
Total revenue	$	1,285		$	2,434		$	3,242		$	10,553		$	9,375
Total costs and expenses		3,820			4,975			19,532			57,206			20,095

Loss from operations		(2,535	)		(2,541	)		(16,290	)		(46,653	)		(10,720	)
Net loss		(2,541	)		(2,878	)		(16,732	)		(49,534	)		(8,160	)
Net loss attributable to common stockholders		(3,081	)		(3,472	)		(25,469	)		(49,640	)		(8,160	)
Basic and diluted net loss per share attributable to common stockholders	$	(2.04	)	$	(2.28	)	$	(16.39	)	$	(8.87	)	$	(1.36	)
Shares used in computing basic and diluted net loss per share attributable to common stockholders		1,514			1,516			1,554			5,594			6,006
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	29		$	961		$	579		$	4,594		$	8,589
Marketable securities		—			—			—			10,305			—
Total assets		781			2,371			27,163			26,967			13,770
Long-term debt and capital lease obligations		17			3,655			1,957			220			6
Redeemable convertible preferred stock		6,295			6,889			15,627			—			—
Stockholders' equity	$	(6,821	)	$	(9,735	)	$	1,801		$	13,608		$	5,642