PART I
ITEM 1. Business
Overview
HealthGate Data Corp. ("HealthGate" or the "Company") provides Quality Improvement and Risk Management Solutions that help healthcare providers and payors improve quality, reduce variability of care and reduce costs. These solutions, when coupled with the Company's technology platform, can be customized and integrated into a variety of healthcare information systems. These customized process improvement tools can then be accessed at the point of care. Additionally, through its Patient Content Repository, HealthGate provides a suite of evidence-based patient education and consumer health content services that allow the patient to be an active participant in the delivery of their own care.
In October 2003, HealthGate acquired substantially all of the assets and selected liabilities of EBM Solutions, Inc. ("EBM Solutions"). Through this acquisition, HealthGate acquired 116 evidence-based clinical guidelines and related intellectual property and technology. In conjunction with its Academic Medical Center Consortium comprised of Vanderbilt University Medical Center, Duke University Medical Center, Emory University Medical School and Oregon Health & Science University, HealthGate is developing order sets, decision trees and other point of care tools that are based on clinical evidence.
As part of HealthGate's mission to improve healthcare quality, reduce costs, and reduce treatment variation, the Company is developing new services and applications to better integrate clinical content into its customers' clinical workflow and processes. During 2004, HealthGate began the development of a new suite of solutions for healthcare organizations that are designed to lower significantly the cost of implementing quality improvement programs, improve patient safety, reduce the risk and exposure of medical liability claims, increase reimbursement, and improve patient care.
On August 23, 2004, HealthGate entered into an Asset Purchase Agreement with EBSCO Publishing ("EBSCO") for the sale of the assets of The Natural Pharmacist ("TNP"). On that same date, EBSCO entered into a reseller agreement with HealthGate under which HealthGate can continue to license and distribute the TNP content for an initial term of 3 years. In addition, HealthGate entered into a reseller agreement with EBSCO for EBSCO to license and distribute HealthGate's Consumer Health Library on an exclusive basis to academic and public libraries for an initial term of three years. Unless notice of intent not to renew is given by either party at least sixty days before the end of the then current term, the terms of both reseller agreements will automatically be extended for successive one-year terms upon the same terms and conditions as the initial term.
On January 18, 2005, HealthGate and EBSCO entered into an Asset Purchase Agreement under which EBSCO is scheduled to acquire the assets of HealthGate's patient content repository business for $8.1 million in cash at closing, plus the assumption of certain liabilities of the business (the "EBSCO Transaction"). This transaction is subject to customary closing conditions, including HealthGate obtaining renewal agreements with certain existing customers and approval by HealthGate's shareholders
The Patient Content Repository products and services represented 100% of HealthGate's revenue in 2002, approximately 99% of revenue in 2003 and approximately 92% of revenue in 2004. HealthGate's business following the planned sale to EBSCO will leave the Company dependent on the performance of (i) HealthGate's evidence-based clinical guidelines, which have a limited operating history and have generated limited revenue to date, (ii) HealthGate's InteractiveIC and Quality Architect products, which remain under development and have not generated any revenue to date and (iii) new products which are not yet under development. Although the Company believes there is growth potential for these Quality Improvement and Risk Management Solutions, there can be no assurance that the Company will be able to successfully execute its new strategy.
HealthGate intends to use the proceeds from the planned sale of the Patient Content Repository business to fund development and marketing of the Company's Quality Improvement and Risk Management Solutions business. The Company does not expect expenses to decrease in 2005 and expects to increase its development expenses and marketing expenses as it continues to develop and market these Quality Improvement and Risk Management Solutions products and services. However, HealthGate cannot assure investors that its Quality Improvement and Risk Management Solutions products and services will achieve significant revenue or profitability or, if significant revenue or profitability is achieved that the Company will be able to sustain them.
HealthGate was incorporated under the laws of the State of Delaware in 1994. HealthGate's Internet address is www.healthgate.com. Through its web site, HealthGate provides free access to its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports.
HealthGate has registered the trademarks "HealthGate," "CHOICE," "activePress," "HealthGate OnSite," "The HealthGateWay," and the HealthGate logo in the United States. On October 27, 2003, HealthGate acquired the U.S. registered trademarks for "EBMSolutions" and "EBMPact." HealthGate has pending applications for "Quality Architect" and "InteractiveIC." 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
Quality Improvement and Risk Management Solutions
HealthGate's Quality Improvement and Risk Management Solutions business is comprised of the following proprietary applications and clinical content: Evidence-based clinical guidelines, InteractiveIC™, and Quality Architect™. HealthGate works in conjunction with major academic medical
centers throughout the United States to create the clinical content that serves as the foundation for the applications HealthGate delivers to customers. Additionally, a portion of the Quality Architect technology is developed in partnership with Infosys Technologies Limited. The technology, content and other intellectual property assets are owned by HealthGate.
The foundation of the Company's Quality Improvement and Risk Management Solutions business is the evidence-based clinical content, which was acquired from EBM Solutions in October 2003. This clinical content is the engine that drives both the InteractiveIC and Quality Architect applications. These applications can help healthcare institutions streamline clinical processes to improve the quality of care they deliver, achieve better reimbursement from payors, limit their risk of medical liability, meet a variety of independent quality measures, and facilitate the accreditation process.
Clinical Guidelines. HealthGate's evidence-based clinical guidelines deliver online health management solutions for over 100 clinical conditions, disease states and certain medical topics including: Cardiology, Oncology/Hematology, Psychiatric/Mental Health, Endocrinology, Nephrology, Ophthalmology, Pulmonary, Ear, Nose, Throat, Neurology, Orthopedics, Urology, Gastroenterology, Obstetrics/Gynecology, and Pediatrics, as well as General Conditions and Wellness Care/Education. A significant portion of the underlying content for these guidelines was acquired from EBM Solutions in October 2003. Since the acquisition of these guidelines, certain of the clinical guidelines have been expanded, improved and revised and HealthGate delivers them to its customers from its proprietary technology platform.
The guidelines are produced through a rigorous process that includes selection and resource identification, content development, and testing and publishing. Recommendations are graded according to the strength of the evidence and benefits of the recommended treatment. Advisors from one or more of HealthGate's Academic Medical Center Consortium, comprised of Vanderbilt University Medical Center, Duke University Medical Center, Emory University Medical School and Oregon Health & Science University, assists in the review of updates to the guidelines.
The guidelines are available in both patient and provider versions. Individual sections within the guidelines include: key points, decision tree, description, importance, causes, signs and symptoms, diagnosis, prevention and treatment, alternative therapy, prognosis, future approaches, references, and information about the author. This is an Internet-based tool hosted by HealthGate or delivered through a Web service. Customers may use the guidelines in various applications. For example, one payor customer determines, in part, physician reimbursement based on whether the physician based the patient's treatment on the clinical guidelines.
InteractiveIC. InteractiveIC is a series of comprehensive interactive tutorials that test and record patient knowledge and understanding in preparation for a medical procedure. These instructive tutorials cover common diagnostic and surgical procedures in the following specialties: Anesthesiology, Cardiology, Ear, Nose and Throat (ENT), Gastroenterology, Laparoscopic Surgery, Neurosurgery, Obstetrics, Oncology, Ophthalmology, Orthopedics, and Urology. All modules include references and are reviewed by board-certified physicians that conduct the specific procedure. An initial set of these tutorials was released in September 2004, and as of February 2005 HealthGate has completed 60 tutorials.
The tutorials feature high-quality color medical illustrations and professional voice-over. They are available in English and Spanish versions are in development. Patients determine the pace of the session and are able to review the information as many times as they wish, review definitions of medical terms, and submit questions and concerns throughout the session.
InteractiveIC is designed to provide customers with flexible integration and customization options. HealthGate can host the application or customers can host it in a Web environment or run it on stand-alone computers. The application may be opened from any Web page or software application that can
open a Web site. This allows the customer to combine it with other information or patient instructions as well as control how the product is launched. The responses and usage data may be written via Web service to any server, so the information can be stored on HealthGate's servers or in the customer's system (including being written into an electronic medical record) regardless of where it is hosted.
Quality Architect: HealthGate is currently developing Quality Architect, a comprehensive quality management solution that leverages the evidence-based clinical guidelines and enables healthcare organizations to design and build a customized quality program based on clinical evidence and practice protocols.
The Quality Architect solution starts with a thorough interview and evaluation process designed to identify areas for quality improvement. From this information, a comprehensive, customized Quality Blueprint is created to target those areas, and provide evidence-based tools and resources at the point of care to meet various national quality improvement standards.
Major components of Quality Architect include:
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• Quality Blueprint —Customized recommendations on how to best implement quality improvement initiatives to meet the
organization's unique needs.
• Clinical Reference Foundation —A collection of core materials for specific diseases and conditions including HealthGate's comprehensive evidence-based clinical guidelines, quality measures matrix, decision support tools such as decision trees and clinical indicators, and HealthGate's proprietary LitAware™ service, which provides a summary of filtered and relevant medical literature and its impact on medical practice.
• Clinical Toolbox —Relevant clinical tools that enable healthcare organizations to create their own customized quality program. These tools include order sets, error prevention and safety checklists, discharge instructions and other point of care tools with content management functionality. Templates for cost effective data collection will also be included to help organizations meet the various reporting demands of Joint Commission on Accreditation of Healthcare Organizations (JCAHO), National Committee for Quality Assurance (NCQA), The Leapfrog Group and other organizations.
• Patient Education Toolbox —Includes interactive educational modules, such as InteractiveIC, that inform and involve patients in the decision-making process in preparation for an upcoming procedure, as well as customizable templates to improve patient satisfaction at the point of care.
The Quality Architect solution also includes HealthGate's proprietary clinical content management system, with which healthcare organizations can edit, review, approve, publish and track the status of the point of care tools and templates. Healthcare providers can edit the evidence-based tools and forms to include their own requirements based on local patient mix and specific clinical situations. This allows customers to minimize treatment variability, improve outcomes as well as build customized quality improvement programs.
HealthGate will host the Quality Architect application. Access to this system requires user login, and access to specific materials and functionality (e.g., editing, approving and releasing) within the system are controlled by user permissions profiles that may be configured by the healthcare organization. All editing activity is performed in this environment to ensure data integrity and access to the latest available materials. Also, with this structure, the healthcare organization does not have to purchase or maintain any server hardware or have its information technology staff perform system maintenance and upgrades.
HealthGate is currently planning for the initial version of Quality Architect to be released during 2005, however there can be no assurance that the timeframe will be met.
Patient Content Repository
HealthGate's Patient Content Repository business is comprised of the following offerings of HealthGate proprietary and licensed content: the Health Outreach Toolkit, the consumer Health Library, CHOICE Web site products, custom and a la carte content offerings, the technology platform on which these products run and the HealthGateWay newsletter creation tool. HealthGate primarily builds its electronic repository of professional and consumer health information by developing its own content in-house. This proprietary content is supplemented by acquiring copyrights to content from third parties and licensing content from other healthcare and medical information providers.
HealthGate's content includes information that has been tagged using one of the standardized medical coding vocabularies. By using this standardized "language" for labeling information, it is faster and easier to pull together all information available on the given topic. HealthGate markets this tagged content to healthcare institutions and related healthcare organizations for use in a variety of clinical systems.
On January 18, 2005, HealthGate and EBSCO entered into an Asset Purchase Agreement under which EBSCO is scheduled to acquire the assets of HealthGate's patient content repository business for $8.1 million in cash at closing, plus the assumption of certain liabilities of the business (the "EBSCO Transaction"). This transaction is subject to customary closing conditions, including HealthGate obtaining renewal agreements with certain existing customers and approval by HealthGate's shareholders. The Patient Content Repository products and services represented 100% of HealthGate's revenue in 2002, approximately 99% of revenue in 2003 and approximately 92% of revenue in 2004.
Proprietary Content
HealthGate currently markets the following proprietary content as part of the Patient Content Repository:
Health Outreach Toolkit. The Health Outreach Toolkit, introduced in the third quarter of 2004, is a pre-packaged offering of HealthGate's proprietary content resources, specifically: Conditions inBrief, Conditions inDepth, Conditions inFull, Procedures inBrief, Procedures inMotion, the suite of interactive tools (Self-Assessment Tools, as well as Anatomy and Condition Explorer) and Journal Notes.
Health Library. The consumer Health Library, introduced in 2003, is a pre-packaged offering of HealthGate's proprietary and licensed content resources, specifically: Conditions inBrief, Conditions inDepth, Conditions inFull, Procedures inBrief, Procedures inMotion, the suite of interactive tools (Self-Assessment Tools, as well as Anatomy and Condition Explorer) and Journal Notes, as well as the Medical Dictionary and Drug Information licensed resources.
Centers of Excellence. These centers allow the Company's customers to more efficiently organize and deliver health care information to their constituents on specific topics. In addition, there is space available in the Centers of Excellence for customers to showcase their own resources including services, related programs, and contact and staff details.
Conditions inBrief. This resource includes approximately 700-word fact sheets that describe more than 450 common diseases, conditions and injuries.
Conditions inFull. This content resource includes almost 50 "Specialty Centers" which provide information topic areas ranging from allergies to weight management and include additional relevant information from a variety of health resources, including government agencies and professional organizations.
Conditions inDepth. This series of articles explores over 100 common conditions in detail. These in-depth reports cover such topics as risk factors, signs and symptoms, diagnostic tests, treatment strategies and prevention.
Procedures inBrief. This resource includes approximately 700-word fact sheets that describe approximately 130 of the most frequently performed diagnostic and surgical procedures in the United States.
Procedures inMotion. This resource contains instructive animations of some of the most common procedures in the following specialties: Anesthesiology, Cardiology, ENT (Ear, Nose and Throat), Gastroenterology, Laparoscopic Surgeries, Neurology, Obstetrics, Oncology, Ophthalmology, Orthopedics, and Urology.
Health Features. These feature magazine-style articles cover health topics that affect people throughout their life cycle.
Journal Notes. This content resource consists of articles that seek to "make sense of medical news" by describing the latest clinical research from leading medical journals throughout the world in language a layperson can understand.
Anatomy Explorer. This resource allows for interactive exploration of the entire body by region and system. It identifies all of the 206 bones and 639 muscles in the human body, and magnifies specific areas for better viewing.
Condition Explorer. This is an interactive content resource for obtaining health information on conditions pertaining to various regions of the body. It allows the user to choose an area of the body and links them to fact sheets on conditions that affect that body part. This is integrated with selected Conditions inBrief articles.
The HealthGateWay newsletter. This product makes use of a Web-based tool to create a customizable electronic newsletter that can combine HealthGate articles with each customer's local news stories and features.
Licensed Content
In addition to proprietary content, the Patient Content Repository also includes well-known, independent and authoritative health and medical content and tools that HealthGate licenses from third parties for distribution to its customers, including the following types of information and representative sources:
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• Patient
education and consumer health content and tools, such as the Merriam-Webster's Medical Dictionary; the USP DI Volume II: Advice for the Patient from Micromedex; and
WebMD's Personal Health Manager.
• The Natural Pharmacist ("TNP"), a comprehensive evidence-based collection of alternative and natural health content for both consumers and healthcare professionals.
• News products, including Reuters Health eLine, NewsRX and WebMD Medical News.
Upon consummation of the EBSCO Transaction, which HealthGate expects to close in the second quarter of 2005, the Company intends to either transfer these licenses to EBSCO or terminate them.
Other Products and Services
Prior to 2003, 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 NBC Internet, Inc. ("NBCi") Web portal alliance and (4) activePress service for publishers. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Technology
HealthGate's technology consists of systems that are a combination of both internally-developed and commercially-available software programs. HealthGate's production Web server systems are hosted at an independent remote data center and run on Intel-based computers operating in Microsoft Windows 2000 and Microsoft Windows 2003 system environments. The software and data storage architecture makes extensive use of.NET-compiled applications, Extensible Markup Language ("XML"), Extensible Stylesheet Language ("XSL") and relational databases. Platform stability is achieved by load-balancing traffic to the HealthGate servers and by architecting the servers with extensive system redundancy. System scalability is designed to be achieved by adding servers when load thresholds are passed using an architecture that uses a data-driven approach for product configuration and delivery flexibility.
Patient Content Repository and Clinical Guidelines
The Company's technology platform enhances HealthGate's Patient Content Repository and Clinical Guidelines by managing and indexing metadata that includes standard data (such as dates, titles, and authors) and controlled medical vocabularies (such as Clinical Classification System, ("CCS") and International Classification of Diseases release 9, ("ICD9") codes). This dynamic technology infrastructure enables HealthGate to meet the challenges of the evolving healthcare content industry and provides customers with greater levels of customization and flexibility.
There are three specific areas of information technology development and maintenance that contribute to the Company's content and tools related to the Patient Content Repository and Clinical Guidelines: (1) Content Normalization, (2) Content Enhancement, and (3) Content Delivery.
Content Normalization
HealthGate converts all text-based content files, regardless of original format, into a unified and consistent XML format. XML is a markup language used to identify text data structures within a document file. For example, all the words within a particular document are classified with an XML tagging structure. A data schema defines the XML tagging structure and all documents are validated to the schema as they are input to the content repository. Meta-information, or additional data that describes each document file, is retained in a relational database. Thus, HealthGate stores well-formed and validated XML and this "content normalization" process enables the Company to offer and flexibly deliver multiple product offerings with differing features, that use the same content files drawn from the same content repository.
Content Enhancement
HealthGate enhances its content repository by indexing the files in it with both a standard word-count-frequency search engine and with standardized medical vocabularies. Users can then access content files either by specifying a word or phrase query for a term that occurs somewhere in the body of the content or by associating exact, meaningful healthcare concepts to each documents' metadata. The full-text searching module enables users to access the repository without specific regard for the level of their expertise, knowledge of medical terms or detailed knowledge of the search command query language whereas the use of standard vocabulary terms enables users to request specific content that clusters around an appropriate medical concept.
Content Delivery
The content repository's delivery software dynamically detects each customer's delivery format preferences and appropriately transforms content files for presentation to each end user. XSL transformation logic files are used to convert the source XML into other data formats, such as the Hypertext Markup Language ("HTML") structure used to display data in Web browsers. The use of these techniques enables HealthGate to provide multiple product offerings with different features that all use the same content files from the same repository.
HealthGate's XML-based healthcare content is customized and delivered so that it appears as a seamless component of the client's existing application and brand. This is accomplished using XSL style sheets that HealthGate has developed to better render HealthGate's content to comply with each customer's own applications. Using a standard format for content articles and developing flexible style sheets has made it possible for HealthGate to generally deliver its current product offerings to a new client within one or two business days of signing an agreement. The Company's content can be delivered over the Internet to its customers in one of the following three ways:
Web sites. Hosted on HealthGate's servers, virtual portions of Web sites are built for each customer to host HealthGate's content in such a way as the pages of the virtual site can be readily integrated into the customer's own Web site. For many of the Company's customers, this is still the best approach for customers to present HealthGate's content to end-users. Some customers extend the integration of HealthGate content into their own Web site by using HTML "Web scraping" techniques.
HealthGate OnSite. Developed in 2002, this File Transfer Protocol ("FTP") delivery method enables customers to download HealthGate's content files and host them on their own servers. This gives customers greater control over when and where HealthGate's content is placed on their Web sites and enables customers to specify and control their own site navigation and other features to further integrate HealthGate's content into their own sites.
Web services. In the Web services delivery model, a customer queries the HealthGate repository directly using Simple Object Access Protocol ("SOAP") or HyperText Transfer Protocol ("HTTP"), as a result of the query, content in a native XML format, enriched with appropriate metadata, is passed directly from the repository to the customer's server where it is formatted for display or integrated in some other way to the customer's environment. This method can be used to give the customer extensive run-time control over the content and its display format.
The technology platform on which HealthGate's Patient Content Repository business is run, is being sold to EBSCO as part of the planned transaction. The Company is currently developing a new platform on which it will run its Clinical Guidelines and other Quality Improvement and Risk Management Solutions.
InteractiveIC
InteractiveIC uses Macromedia's Flash for its interactive content and assessments delivered within an HTML or.NET wrapper depending on its delivery context. This architecture supports the level of user interface interactivity necessary to engage and maintain users' attention without sacrificing the deployment flexibly HealthGate's customers have come to expect and appreciate.
InteractiveIC may be run on a stand-alone PC or mobile computing device capable of running Flash applications, hosted on a file server as a set of platform-independent HTML and XML files, or hosted in HealthGate's secure Web hosting environment within a.NET application and utilizing a SQL Server database to control access and track system usage.
Quality Architect
In addition to encompassing the technologies and applications used in the products above, Quality Architect adds an extensive set of tools necessary for creating, deploying, and maintaining the clinical content and tools integral to clinical quality improvement initiatives. Using a mix of third-party components and proprietary code, Quality Architect facilitates team task coordination, robust content and tool editing in a "what-you-see-is-what-you-get" ("WYSIWYG") interface, content management and deployment functionality, and system usage reporting.
Sales, Marketing and Customer Relationship Management
HealthGate primarily uses its own sales personnel to sell its products and services. An account management team is responsible for facilitating the sales process as well as sales support functions such as customer relationship management, sales engineering, customer and prospect database maintenance, and scheduling online product demonstration sessions and seminars with current and prospective customers.
Although substantially all of HealthGate's revenues are generated by its own sales force, in the past HealthGate has had reseller and distributor agreements with Data General, GE Medical Systems and HCA-Information.
HealthGate believes that customer service is an important factor in it being able to retain customers and attract new ones. The Company is therefore committed to providing high levels of service and support with its customer relationship management process. HealthGate is constantly seeking opportunities to repackage or repurpose existing assets as new products or services for its customers. The Company researches market trends, confers with health industry experts and thought leaders, and (by engaging with its customers) reviews competitive and complementary product offerings in order that it can be in a position to offer its customers the best available solutions.
In conjunction with its Patient Content Repository business, HealthGate currently distributes weekly and monthly e-mail newsletter publications to its customers. These newsletters include contemporary health and wellness information, highlighted customer case studies and the latest news (put into context) emerging from the field of study relating to evidence-based medicine. The Company believes that these newsletters enable its customers to quickly understand and integrate new initiatives into their Web-based communication and knowledge programs. HealthGate also participates in tradeshows, conferences and other venues in order to interact directly with potential and existing customers and partners.
HealthGate's senior management team conducts an executive outreach program. This program involves engaging customers in a dialog about their businesses, their Web strategies, quality improvement and risk management strategies, and their internal operational challenges. The primary focus of the program is for the Company to learn how it can help support a broad range of its customers' strategic and tactical needs. The program also enables the Company to validate the demand for its new product initiatives.
Competition
Quality Improvement and Risk Management Solutions
HealthGate competes, directly and indirectly, for customers, content and service providers, strategic partners, and acquisition candidates with several of the companies that provide quality improvement and risk management solutions and tools, such as:
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• Publishers
of clinical guidelines and research update services such as InfoPOEMS, Milliman Care Guidelines, Up-to-Date, National Guideline
Clearinghouse; and
• Information solution providers that provide applications with integrated point of care tools such as Elsevier, Hearst Corporation, McKesson Corporation, and Wolters Kluwer Health.
The Company believes that the principal competitive factors in its target markets for Quality Improvement and Risk Management Solutions are comprehensiveness and quality of clinical information and tools, ease of use, ability to revise based on customer protocols, value add and integration capability, pricing and quality of support.
Patient Content Repository
The market for health content and related Web services is intensely competitive. Presently, HealthGate competitors include the following types of companies:
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• Health
and medical print and electronic publishers targeting the healthcare enterprise such as StayWell, Healthwise, Health Ink & Vitality, and A.D.A.M.; and
• Healthcare consulting and Web development firms such as Greystone.net and Coffey Communications.
The Company believes that the principal competitive factors in its target markets for its Patient Content Repository are comprehensiveness and quality of content and tools, value add and integration capability, pricing, quality of support and customer's ability to host content.
Some of HealthGate's competitors for Quality Improvement and Risk Management solutions and for Patient Content Repository content 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; stronger, greater brand recognition; more advantageous strategic alliances and partnerships; and larger customer bases. See "—Risk Factors—HealthGate faces competition in licensing its products and services and 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.
The federal Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 (the "CAN-SPAM Act") took effect on January 1, 2004. The CAN-SPAM Act regulates the use of commercial electronic messages in the United States and provides for both civil and criminal penalties. HealthGate has taken steps to assure that its distribution of electronic newsletters on behalf of its clients complies with any applicable provisions of the CAN-SPAM Act.
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 certain customer sites that the Company hosts and reports this information to these customers. 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.
Tax authorities on the federal, state and local levels are currently reviewing the appropriate tax treatment of companies engaged in Internet commerce. New state regulations may subject us to additional state sales, income and other taxes. In December 2004, the federal law that placed a temporary moratorium on certain types of taxation on Internet commerce was extended through December 2007. Bills have been proposed in both the United States House of Representatives and Senate to extend the moratorium on taxation.
HealthGate may require users to register to access some content resources including the Clinical Guidelines. The information collected may include full name, email address and a username and password selected by the user. The information is stored to remind users what password they selected. HealthGate may also use this information to determine registration date and last login date and report this information on an aggregate basis to third parties or applicable customers. HealthGate does not share any personally identifiable information with any third party. HealthGate does not collect or store personal health information. Any additional government regulations imposed to protect the privacy of Internet users may affect HealthGate.
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—Government regulation of the Internet may result in increased costs of using the Internet, which could adversely affect HealthGate's business and—Risk Factors—Tax treatment of companies engaged in Internet commerce may adversely affect the Internet industry and HealthGate," below.
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. 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 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.
Employees
As of December 31, 2004, HealthGate had a total of 30 employees. Of these employees 17 serve in research and development, 7 in administration and 6 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. Following the scheduled sale of the Patient Content Repository assets to EBSCO, HealthGate anticipates that approximately 8 of its employees will accept employment with EBSCO.
Risk Factors
HealthGate's business involves significant risks and uncertainties. HealthGate operates in a highly competitive and rapidly evolving electronic healthcare content industry. The risks and uncertainties described below are some of those that HealthGate currently believe may affect the Company.
Risks related to the EBSCO Transaction.
The successful completion of the EBSCO Transaction will expose HealthGate to a number of new risks and contingent liabilities that could have a material impact on the Company's financial condition, including the following:
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• HealthGate
has agreed to indemnify EBSCO for one (1) year after the close of the Agreement for any breach of HealthGate's representations, warranties or covenants
contained in the Asset Purchase Agreement and for other matters, up to a cap of $2,000,000, provided that there are certain exceptions to the time limit and cap.
• Management could spend or invest the proceeds from the EBSCO transaction in ways with which the Company's stockholders may not agree, including the possible pursuit of other market opportunities.
• HealthGate will be unable to compete in businesses that are competitive with the products in the Patient Content Repository business for three (3) years from the date of closing, which may limit the Company's ability to develop future products.
• By selling the Patient Content Repository, HealthGate will be selling the assets that generate the Company's most significant sources of revenue. The Patient Content Repository products and services represented 100% of HealthGate's revenue in 2001 and 2002, approximately 99% of revenue in 2003 and approximately 92% of revenue in 2004. HealthGate will retain the evidence-based clinical guidelines, which have a limited operating history and have generated limited revenue to date. HealthGate will also retain the InteractiveIC™ and Quality Architect™ products, which have not generated any revenue to date.
• HealthGate's business following the sale to EBSCO Publishing will leave the Company dependent on the performance of (i) its evidence-based medical guidelines and products and services, which have a limited operating history, (ii) InteractiveIC and Quality Architect products and services which remain under development and have not generated any revenues to date and (iii) new products which are not yet under development.
HealthGate has a history of losses, the Company expects that losses will continue for at least the next twelve months and the Company's independent registered public accounting firm has expressed substantial doubt about the Company's ability to continue as a going concern. The Company has lost money in every year since it started its business and has an accumulated deficit of approximately $99.9 million as of December 31, 2004. HealthGate plans to invest the proceeds from the sale of the Patient Content Repository business to develop and market its remaining Quality Improvement and Risk Management Solutions products and services. As a result, HealthGate expects to continue to lose money for at least
the next twelve months. There can be no assurance that the Company will ever achieve or sustain profitability or that the Company's operating losses will not increase in the future. We have received a report from the Company's independent registered public accounting firm containing an explanatory paragraph stating that HealthGate's historical losses and negative cash flows from operations raise substantial doubt about the Company's ability to continue as a going concern. HealthGate believes it will need to successfully complete the sale of its Patient Content Repository business to EBSO for $8.1 million or successfully execute alternative operational or financing plans to eliminate this uncertainty.
Failure to generate sufficient revenues, or raise additional capital will have a material adverse effect on HealthGate's long-term viability and ability to achieve the Company's intended business objectives. The Company's future liquidity and capital requirements will depend upon numerous factors, including the closing of the sale of the Patient Content Repository assets and business to EBSCO, the success of marketing and licensing existing and new Quality Improvement and Risk Management Solutions products and services, and continued cost containment. Based on the proceeds from the scheduled sale of the Patient Content Repository business, current forecasted cash flows and cash and cash equivalents on hand, HealthGate currently anticipates its cash resources will be sufficient to finance operations for at least the next twelve months. The future beyond the next twelve months is dependent on the Company's ability to attain consistent break-even or positive cash flow, or raise additional financing. HealthGate 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 private financing, strategic relationships or other arrangements. There can be no assurance that additional funding, if needed, will be available on terms acceptable to HealthGate, or at all.
HealthGate may be unable to raise additional funds or generate sufficient cash from operations to meet its future capital requirements and execute its business plan. The Company has a history of operating losses. HealthGate is monitoring its cash position carefully and evaluating its future operating cash requirements in the context of its strategy, business objectives and expected business performance. Proceeds from the planned EBSCO transaction will increase the Company's cash reserves and are expected to meet funding requirements for support of the Company's operations for at least the next twelve (12) months. Depending on revenues from Quality Improvement and Risk Management Solutions products and the costs of developing and marketing the Company's products, the Company may be required to raise additional capital in order to sustain and fund its operations over the long term. HealthGate may pursue the issuance of additional equity or debt securities to the extent funding raised from other business alternatives is not sufficient to meet the Company's funding requirements. There can be no assurance that adequate funds will be available when needed and on acceptable terms.
HealthGate faces competition in licensing its products and services and may not be able to compete effectively. The market for healthcare quality improvement and risk management products and services is competitive and rapidly changing. With only moderate barriers to entry in a rapidly evolving industry, there are now several companies offering users similar tools, solutions, content, products and services. HealthGate expects that competition will continue to grow. 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.
HealthGate's financial success will depend upon its ability to manage any growth in the Company's business with limited resources. If HealthGate is successful in increasing the revenues of its Quality Improvement and Risk Management Solutions business, the Company may be required to expand its operations. If HealthGate is required to expand its operations, expansion will likely result in new and
increased responsibilities for management personnel and place significant strain on the Company's management, operating and financial systems and other resources. To accommodate any such growth and compete effectively, HealthGate will be required to implement improved information systems, procedures and controls, and to expand, train, motivate and manage its work force. Future success will depend to a significant extent on the ability of current and future management personnel to operate effectively both independently and as a group. HealthGate cannot assure its investors that its personnel, systems, procedures and controls will be adequate to support its future operations.
HealthGate's business prospects may suffer if the Company is not able to keep up with the rapid technological developments in the healthcare industry The healthcare 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 the Company's products. To be successful, HealthGate must continue to develop or license leading technology, enhance its existing products and services and respond to emerging industry standards and practices on a timely and cost-effective basis. HealthGate has been able to effectively adopt and implement new technologies to date, however, there can be no assurances that the Company could continue to do so. If HealthGate is unable to respond successfully to these developments, particularly in light of the rapid technological changes in the healthcare industry generally and the highly competitive market in which the Company operates, HealthGate's business, results of operations and the market price of its common stock could be adversely affected.
HealthGate's quarterly operating results may fluctuate, which could affect the market price of the Company's common stock in a manner unrelated to the Company's long-term performance. HealthGate'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:
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• Development
costs of Quality Architect or other new products which require up front investments prior to any revenue;
• Acquisition of new products which may require additional investments;
• Increases in sales and marketing expenses;
• Timing and amount of revenues from newly released products and products under development; and
• The amount and timing of expenses required to integrate operations and technologies from joint ventures or other business combinations or investments.
The expense levels are in part based on our expectations concerning future revenue and these expense levels are predominately fixed in the short-term. If the Company has lower revenue than expected, it may not be able to reduce spending in the short-term in response. Any shortfall in revenue would have a direct impact on results of operations. In this event, the price of HealthGate's common stock may fall.
The performance of the Company's computer systems is critical to its business and its business will suffer if HealthGate experiences system failures. The performance of the Company's computer systems is critical to its reputation and ability to attract and retain customers. HealthGate provides products and services based on sophisticated computer and telecommunications software and systems, which may contain undetected errors or failures when introduced into existing systems. The Company cannot guarantee that it will not experience significant service interruptions in the future. HealthGate is also
dependent upon Web browsers and Internet service providers to provide Internet users access to its products and services. 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. System errors or failures that cause a significant interruption in the availability of the Company's products or services could cause HealthGate to lose potential or existing users, customers or subscribers and could result in damage to the Company's reputation or a decline in its stock price.
HealthGate has also developed a disaster recovery plan to respond to system failures. The Company cannot guarantee that its disaster recovery plan is capable of being implemented successfully or that its insurance will be adequate to compensate the Company 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 had approximately 30 employees as of December 31, 2004. In conjunction with the pending EBSCO transaction, HealthGate expects to reduce its workforce to approximately 22 employees. Our future success depends on our ability to retain, train and motivate employees, and to identify, attract, and hire highly skilled technical, managerial, editorial, sales and customer service personnel. HealthGate cannot guarantee that the Company will be able to retain or attract skilled personnel.
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 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. The Company has registered "HealthGate," "HealthGate OnSite," "The HealthGate Way" and the HealthGate logo as trademarks in the United States. On October 27, 2003, HealthGate acquired the U.S. registered trademarks for "EBMSolutions" and "EBMPact." Applications are pending for "Quality Architect" and "InteractiveIC." Effective trademark, copyright and trade secret protection may not be available in every country in which the Company's 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 the Company's proprietary rights to the same extent, as do the laws of the United States.
Other parties may assert infringement claims against HealthGate 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 the Company spending a significant amount of time and money to dispose of them.
HealthGate's business may be adversely affected if the Company is unable to continue to license software that is necessary for the development of products and services. HealthGate relies on a variety of technologies that are licensed from third parties which is used in the Company'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.
HealthGate is subject to the new requirements adopted by the Securities and Exchange Commission in response to the passage of the Sarbanes-Oxley Act of 2002 and there can be no guarantee that the Company will be able to fully comply with the documentation requirements in the time period allowed under the Sarbanes-Oxley Act. For several years HealthGate has had internal controls and disclosure procedures in place to ensure that its periodic reports as filed with the U.S. Securities and Exchange Commission are accurate. Following enactment of the Sarbanes-Oxley Act, the Company has focused on further
improving and clarifying (including documenting) its internal controls and procedures. Among other Sarbanes-Oxley Act requirements, pursuant to Section 404 of the Sarbanes-Oxley Act, the SEC adopted rules requiring auditors to attest to and report on management's assessment of internal controls (a "Section 404 Audit") beginning with the audit of the financial statements for the year ended December 31, 2006. Although management believes that our internal controls and procedures are effective, there can be no guarantee that HealthGate, with its limited size and limited financial staff, will be able to fully comply in a timely manner with the Section 404 Audit requirements. Additionally, attempts to comply with the Section 404 Audit requirements and other improvements to the Company's internal controls or in documentation of such internal controls could be costly to prepare or implement.
HealthGate is not current in its filings with the Securities and Exchange Commission As indicated on the cover page of this Annual Report on Form 10-K, HealthGate has not filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934. Despite good faith efforts, due to the lack of documentation concerning EBM Solutions' financial operations prior to HealthGate's acquisition of substantially all their assets, the Company was unable to provide audited historical financial statements of EBM Solutions and related pro forma information in an amendment to Form 8-K that was due to be filed with the Securities and Exchange Commission on or before January 12, 2004. Although certain financial information about EBM Solutions is contained in HealthGate's audited financial statements for the years ended December 31, 2003 and 2004, such information does not satisfy the requirements of Form 8-K. As a result of the failure to file the historical EBM Solutions financial statements and related pro forma information as required by SEC Form 8-K, HealthGate is not eligible to use SEC Forms S-2 or S-3, the SEC will not declare effective any HealthGate registration statements and HealthGate may not make offerings under Rules 505 and 506 of Regulation D where any purchasers are not accredited investors (as defined in Rule 501(a)). Accordingly, HealthGate's ability to have public offerings of shares of its stock or have offerings of its shares of stock to unaccredited investors under Regulation D will be limited.
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 HealthGate's business, results of operations and the market price of the Company's common stock.
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 December 2004, the federal law that placed a temporary moratorium on certain types of taxation on Internet commerce was extended through December 2007. Bills have been proposed in both the United States House of Representatives and Senate to extend the moratorium on taxation. HealthGate cannot predict whether such bills will become law or 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 transmission of content. Any new legislation, regulation or application or interpretation of existing laws would likely increase the cost of doing business and may adversely affect HealthGate's results of operations and the market price of the Company's common stock.
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