<PAGE>
As filed with the Securities and Exchange Commission on May 17, 1999
Registration No. 333-75071
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
CareInsite, Inc.
(Exact name of registrant as specified in its charter)
Delaware 7374 22-3630930
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
---------------
CareInsite, Inc.
669 River Drive, River Drive Center II
Elmwood Park, New Jersey 07407
(201) 703-3400
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
---------------
David C. Amburgey
CareInsite, Inc.
Vice President -- General Counsel
669 River Drive, River Drive Center II
Elmwood Park, New Jersey 07407
(201) 703-3400
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------
Copies to:
Stephen T. Giove
Shearman & Sterling Alan L. Jakimo
Brown & Wood LLP
599 Lexington Avenue One World Trade Center
New York, New York 10022 New York, New York 10048
(212) 848-4000 (212) 839-5300
---------------
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the
same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Title of each
class of Proposed Maximum Proposed Maximum Proposed Maximum Amount of
Securities to be Amount to Offering Aggregate Registration
Registered be Registered Price per Share(1) Offering Price(1) Fee(2)
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common
Stock,
$0.01
par
value
per
share.. 6,497,500 shares $16.00 $103,960,000 $28,901
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act of 1933.
(2) A filing fee of $17,236 was paid upon the first filing of this
Registration Statement on March 26, 1999. The remaining balance of $11,665
is being paid with the filing of this Amendment No. 3.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment that specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This preliminary prospectus +
+is not an offer to sell these securities and is not soliciting an offer to +
+buy these securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
PROSPECTUS Preliminary Prospectus dated May 17, 1999
5,650,000 Shares
CareInsite, Inc.
Common Stock
-----------
We are offering to the public 5,650,000 shares of our common stock. We are
reserving 565,000 of these shares for sale to directors, officers, employees
and consultants of our company, of Synetic, Inc., which owns 80.1% of our
common stock immediately prior to this offering, and of Cerner Corporation, a
strategic shareholder which owns 19.9% of our common stock immediately prior to
this offering, and to certain other persons. In addition, Cerner Corporation
has agreed to purchase directly from us 600,000 shares of our common stock in a
separate private transaction concurrently with this offering.
This is our initial public offering and no public market exists for our
shares. We anticipate that the initial public offering price will be between
$14.00 and $16.00 per share.
We have applied to list our common stock on the Nasdaq National Market
under the symbol " ."
Investing in the shares of our common stock involves risks which are
described in the "Risk Factors" section beginning on page 8 of this prospectus.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price.................................... $ $
Underwriting discount.................................... $ $
Proceeds, before expenses, to our company................ $ $
</TABLE>
The above table does not include estimated net proceeds of $ expected
to be received in connection with the private sale of 600,000 shares of common
stock to Cerner concurrently with this offering.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these shares of common stock or
determined if this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
We have granted the underwriters the right to purchase up to an additional
847,500 shares of common stock to cover over-allotments. The underwriters
expect that the shares of common stock will be ready for delivery in New York,
New York on or about , 1999.
-----------
Merrill Lynch & Co. Warburg Dillon Read LLC
-----------
The date of this prospectus is , 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 3
Risk Factors............................................................. 8
Disclosure Regarding Forward-looking Information......................... 17
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Consolidated Financial and Operating Data....................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 29
Management............................................................... 42
Security Ownership of Management......................................... 52
Transactions and Relationships With Principal Stockholders............... 54
Description of Capital Stock............................................. 58
Shares Eligible for Future Sale.......................................... 60
Underwriting............................................................. 62
Legal Matters............................................................ 65
Experts.................................................................. 65
Additional Information................................................... 65
Index to Consolidated Financial Statements............................... F-1
</TABLE>
----------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock. Unless otherwise indicated, all
information in this prospectus:
. assumes no exercise of the underwriters' over-allotment option,
. reflects a 50.0625 for 1 split of the common stock effected in the
form of a stock dividend to be declared and paid prior to the
closing of this offering, and
. reflects the filing of our amended and restated certificate of
incorporation with the Delaware Secretary of State prior to the
closing of this offering.
----------------
Until , 1999 (25 days after the commencement of this offering), all
dealers that buy, sell or trade our common stock, whether or not participating
in this distribution, may be required to deliver a prospectus. This delivery
requirement is in addition to the obligation of dealers to deliver a prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
----------------
CareInsite(TM) is a pending trademark of our company.
2
<PAGE>
SUMMARY
This summary highlights information contained elsewhere in this
prospectus. It is not complete and may not contain all of the information that
you should consider before investing in our common stock. You should read the
entire prospectus carefully, including the "Risk Factors" section and the
consolidated financial statements and the notes to those statements.
The Company
We are developing and intend to provide an Internet-based healthcare
electronic commerce network that links physicians, payers, suppliers and
patients. We intend to market a comprehensive set of transaction, messaging and
content services to these healthcare industry participants. Our network, which
we call the CareInsite system, is being designed to provide physicians with
relevant clinical, administrative and financial information from payers and
suppliers. We believe our integration of payer-specific rules and healthcare
guidelines with patient-specific information at the point of care will improve
the quality of patient care, lead to more appropriate use of healthcare
resources, gain compliance with benefit plan guidelines and control healthcare
costs.
Healthcare expenditures in the United States totaled approximately $1.0
trillion in 1996, representing a 6.7% compound annual increase since 1990. This
trend is expected to continue. Approximately 85% of annual healthcare costs in
the United States are estimated to be represented by patient care costs as
opposed to administrative costs. We believe that the ability of managed
healthcare organizations to reduce this larger 85% component of healthcare
costs is limited today. Control of these costs is dependent upon compliance
with benefit plan guidelines designed to promote the appropriate use of
healthcare resources and adherence to best clinical practices. We believe
payers are unlikely to gain compliance with these guidelines without an
efficient channel of communication to their affiliated physicians. Our
objective is to provide a leading healthcare e-commerce channel that will
enable real time communication of clinical, administrative and financial
information at the point of care to facilitate compliance with benefit plan
guidelines and control healthcare costs.
We have entered into two significant relationships that represent the
initial execution of our business strategy. Our strategic relationship with
Cerner Corporation provides us with a perpetual, royalty-free license to
several components of Cerner's technology. These components form the foundation
for our CareInsite system. We have also entered into an agreement with The
Health Information Network Connection LLC, referred to as "THINC", an entity
founded by several major managed care organizations in the New York
metropolitan area to facilitate the confidential exchange of healthcare
information. Under this agreement, we are managing THINC's operations and will
make a comprehensive suite of healthcare e-commerce services available to the
New York metropolitan area's more than 40,000 physicians. We have not derived
any revenues from our healthcare e-commerce services to date.
We are a majority-owned indirect subsidiary of Synetic, Inc., a publicly
traded corporation. Synetic has entered into a definitive merger agreement with
Medical Manager Corporation that provides for a strategic business combination
between the two companies. Medical Manager is a leading provider of
comprehensive physician practice management systems that automate the office
tasks for a physician base estimated at more than 120,000 in more than 24,000
medical practices nationwide. In connection with this business combination,
Medical Manager and our company have entered into an agreement under which we
intend to provide our healthcare e-commerce services to Medical Manager's
physicians by integrating those services into Medical Manager's physician
practice management systems. We intend to use Medical Manager's network of
independent and company-owned offices with almost 2,000 sales and technical
support personnel as a platform from which to distribute, install and support
our transaction, messaging and content services to Medical Manager physicians.
3
<PAGE>
Upon completion of the offering and the concurrent private sale of
600,000 shares of our common stock to Cerner, Synetic will own approximately
72.8% of the outstanding common stock of our company. Prior to the offering,
Cerner owned 19.9% of our outstanding common stock, and has agreed to purchase
directly from us 600,000 shares of our common stock in a separate private
transaction concurrently with this offering. After completion of the offering
and the concurrent private sale of 600,000 shares of our common stock to
Cerner, Cerner will own approximately 19.0% of the outstanding common stock of
our company. We will also issue to Cerner approximately 2,503,125 shares of our
common stock on or after February 15, 2001 at a price of $.01 per share if we
realize a specified level of physician usage of our services. In addition,
THINC and Cerner have warrants exercisable for an aggregate of 4,866,882 shares
of our common stock. These warrants are exercisable six months after completion
of this offering.
----------------
Our principal executive offices are located at 669 River Drive, River
Drive Center II, Elmwood Park, New Jersey 07407 and our telephone number at
that address is (201) 703-3400.
4
<PAGE>
The Offering
Common stock offered by our
company.............................
5,650,000 shares
Common stock outstanding
immediately prior to the
offering........................... 62,500,000 shares
Common stock outstanding after the
offering............................ 68,750,000 shares, including
600,000 shares which Cerner has
agreed to purchase directly from us
in a separate private transaction
concurrently with this offering.
Use of proceeds.....................
We intend to use the net proceeds
from this offering for working
capital, including financing the
cost of development and deployment
of our services, increased sales
and marketing activities, and for
general corporate purposes. We may
use a portion of the net proceeds
to fund acquisitions. See "Use of
Proceeds."
Dividend policy..................... We do not anticipate paying any
cash dividends in the foreseeable
future. See "Dividend Policy."
Proposed Nasdaq National Market
symbol.............................. " "
Risk factors........................ You should consider the risks
involved in an investment in our
common stock. See "Risk Factors."
The foregoing information excludes:
. an aggregate of 4,866,882 shares of common stock representing
approximately 7.1 % of our common stock outstanding after the
offering which may be issued from time to time upon the exercise of
warrants held by THINC and Cerner;
. approximately 2,503,125 shares of common stock representing
approximately 3.6% of our common stock outstanding after the
offering which will be issued on or after February 15, 2001 to
Cerner at a price of $.01 per share if we realize a specified level
of physician usage of our services; and
. shares of common stock which may be issued upon the exercise of
options outstanding on the date of this prospectus granted pursuant
to our employee stock option plan or our officer stock option plan
and an additional shares of common stock reserved for issuance
pursuant to these plans. The weighted average exercise price of all
options outstanding on the date of this prospectus is the initial
public offering price per share.
5
<PAGE>
Summary Consolidated Financial Data
(in thousands, except share data)
On December 24, 1996, Synetic acquired Avicenna Systems Corporation. This
acquisition marked the inception of Synetic's healthcare e-commerce business.
The "As Adjusted" consolidated balance sheet data below is based on 62,500,000
shares of common stock outstanding on March 31, 1999, as adjusted to give
effect to (1) the sale of the 5,650,000 shares of common stock offered to the
public hereby and the receipt of the estimated net proceeds after deducting
underwriting discounts and commissions and the estimated offering expenses and
(2) the concurrent sale by us of 600,000 shares of common stock to Cerner in a
separate private transaction. See note (1) to our consolidated financial
statements for an explanation of the determination of the number of shares used
to compute basic and diluted net loss per share. See also "Transactions and
Relationships with Principal Stockholders -- Certain Agreements." The summary
consolidated financial data for our company as of March 31, 1999, for the nine-
month periods ended March 31, 1998 and 1999 and for the cumulative period from
Inception (December 24, 1996) through March 31, 1999 are derived from our
unaudited consolidated financial statements which, in the opinion of our
management, include all normal and recurring adjustments necessary to present
fairly the financial position and the results of operations of our company for
those periods. The operating results for the nine months ended March 31, 1999
are not necessarily indicative of the operating results to be expected for the
full year. The following summary consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," our consolidated financial statements and notes
thereto and other financial information included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Cumulative
Period from from
inception Nine months ended inception
(12/24/96) Year March 31, (12/24/96)
through Ended ------------------- through
06/30/97 06/30/98 1998 1999 03/31/99
----------- -------- -------- --------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Service revenue (related
party)................. $ -- $ -- $ -- $ 213 $ 213
Cost of services
(related party)........ -- -- -- 213 213
Costs and expenses
Research &
development.......... 7,652 4,762 3,976 8,720(/1/) 21,134(/1/)
Sales & marketing..... 1,150 1,733 1,232 1,427 4,310
General &
administrative....... 1,379 3,887 2,589 2,944 8,210
Litigation costs...... -- -- -- 2,500(/2/) 2,500(/2/)
Other income, net..... (9) (47) (7) (110) (166)
Acquired in-process
research &
development.......... 32,185(/3/) -- -- -- 32,185(/3/)
-------- -------- -------- --------- --------
Total costs &
expenses........... 42,357 10,335 7,790 15,694 68,386
-------- -------- -------- --------- --------
Net loss................ $(42,357) $(10,335) $ (7,790) $ (15,481) $(68,173)
======== ======== ======== ========= ========
Net loss per share --
basic & diluted....... $ (0.85) $ (0.21) $ (0.16) $ (0.29) $ (1.33)
Weighted average shares
outstanding -- basic &
diluted................ 50,063 50,063 50,063 54,208 51,444
</TABLE>
(Footnotes on following page)
6
<PAGE>
<TABLE>
<CAPTION>
03/31/99
-------------------
06/30/97 06/30/98 Actual As Adjusted
-------- -------- ------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (deficit)............. $(1,592) $ 775 $ 4,342
Total assets.......................... 3,476 10,833 43,935
Stockholders' equity.................. 1,566 7,798 41,250
</TABLE>
- --------
(1) As a result of obtaining a license to the Cerner technology, certain
software that we previously capitalized was deemed duplicative and rendered
obsolete and had no alternative future use. Consequently, approximately
$2,381,000 of capitalized software costs were written off and included in
expenses.
(2) Represents charges relating to expenses incurred in conjunction with the
Merck litigation in the quarter ended March 31, 1999. See "Risk Factors --
Litigation by Merck & Co., Inc. and Merck-Medco Managed Care, L.L.C.
against our company."
(3) Represents a non-recurring charge related to the write-off of acquired in-
process research and development costs in conjunction with the purchase of
Avicenna Systems Corporation and CareAgents, Inc.
7
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making a
decision to invest in our common stock. Some of the following factors relate
principally to our business and the industry in which we operate. Other factors
relate to our company's relationship with Synetic and our strategic partners.
Finally, other factors relate principally to your investment in our common
stock. The risks and uncertainties described below are not the only ones facing
our company. Additional risks and uncertainties not presently known to us or
that we currently deem immaterial may also impair our business and operations.
If any of the matters included in the following risks were to occur, our
business, financial condition, results of operations, cash flows or prospects
could be materially adversely affected. In such case, the trading price of our
common stock could decline, and you could lose all or part of your investment.
Evaluating our business is difficult because our business model is unproven; we
only recently began to generate revenues and we have incurred net losses since
inception
Our company began operations in December 1996 and we have not yet
delivered any of our healthcare e-commerce services. Therefore, our historical
financial information is of limited value in projecting our future operating
results. We did not generate our first revenues, which were related to the
provision of management services to THINC, until the quarter ended March 31,
1999. As of March 31, 1999, we had an accumulated deficit of $68.2 million. We
expect to continue to incur significant development, deployment and sales and
marketing expenses in connection with our business. We may also incur expenses
in connection with acquisitions or other strategic relationships which we may
enter into. As a result, we expect that we will continue to incur operating
losses for at least the next two fiscal years and we caution that we may never
achieve or sustain profitability. In addition, it is difficult to value our
business and evaluate our prospects because our revenue and income potential is
unproven and our business model is still emerging. The provision of services
using Internet technology in the healthcare e-commerce industry is a developing
business that is inherently riskier than businesses in industries where
companies have established operating histories.
We will not become profitable unless we achieve sufficient levels of physician
penetration and market acceptance of our services
Our business model depends on our ability to generate usage by a large
number of physicians with a high volume of healthcare transactions and to sell
healthcare e-commerce services to payers and other healthcare constituents. The
acceptance by physicians of our transaction, messaging and content services
will require adoption of new methods of conducting business and exchanging
information. We cannot assure you that physicians will integrate our services
into their office workflow, or that the healthcare market will accept our
services as a replacement for traditional methods of conducting healthcare
transactions. The healthcare industry uses existing computer systems that may
be unable to access our Internet-based solutions. Customers using existing
systems may refuse to adopt new systems when they have made extensive
investment in hardware, software and training for existing systems or if they
perceive that our CareInsite system will not adequately protect proprietary
information. Failure to achieve broad physician penetration or successfully
contract with healthcare participants would have a material adverse effect on
our business, financial condition and results of operations.
Achieving market acceptance for our services will require substantial
marketing efforts and expenditure of significant funds to create awareness and
demand by participants in the healthcare industry. We believe that we must gain
significant market share with our services before our competitors introduce
alternative services with features similar to ours. We cannot assure you that
we will be able to succeed in positioning our services as a preferred method
for healthcare e-commerce, or that any pricing strategy that we develop will be
economically viable or acceptable to the market. Failure to successfully market
our services would have a material adverse affect on our business, financial
condition and results of operations.
8
<PAGE>
Our business prospects will suffer if we are not able to quickly and
successfully deploy our CareInsite system
We believe that our business prospects will suffer if we do not deploy
our services quickly. We have not deployed our architecture or processed any
transactions over our CareInsite system. We currently intend to deploy access
to our services by the end of 1999, although we cannot assure you that we will
be able to do so at that time, or at all. In order to deploy our services, we
must integrate our architecture with physicians', payers' and suppliers'
systems. We will need to expend substantial resources to integrate our
CareInsite system with the existing computer systems of large healthcare
organizations. We have limited experience in doing so, and we may experience
delays in the integration process. These delays would, in turn, delay our
ability to generate revenue from our services and may have a material adverse
effect on our business, financial condition and results of operations. Once we
have deployed our CareInsite system, we may need to expand and adapt it to
accommodate additional users, increased transaction volumes and changing
customer requirements. This expansion and adaptation could be expensive. We may
be unable to expand or adapt our network infrastructure to meet additional
demand or our customers' changing needs on a timely basis and at a commercially
reasonable cost, or at all. Any failure to deploy, expand or adapt our
CareInsite system quickly could have a material adverse effect on our business,
financial condition and results of operations.
We rely on strategic relationships that may not provide anticipated benefits
To date, we have entered into strategic relationships with Cerner and
THINC. These relationships are in the early stages of development. We may enter
into additional strategic relationships in the future. We cannot assure you
that any of these relationships will provide us with the ability to
successfully develop or sell our services. In addition, we may not be able to
establish relationships with or provide our services to key participants in the
healthcare industry if we have established relationships with their
competitors. Consequently, it is important that we are perceived as independent
of any particular customer or partner. Also, some of our current and potential
partners may decide to compete with us. If any of our current or future
strategic relationships are disrupted, or if we do not realize the expected
benefits from these relationships, our business, financial condition and
results of operations may be materially adversely affected.
We may make acquisitions and integrating them into our business could be
expensive, time consuming and may strain our resources
We may make acquisitions of companies which we believe have attractive
technologies or distribution channels. Integrating newly acquired organizations
and technologies into our company could be expensive, time consuming and may
strain our resources. The healthcare industry is consolidating and we expect
that we will face intensified competition for acquisitions. We cannot assure
you that we will succeed in consummating any such strategic relationships or
acquisitions, that such transactions will ultimately provide us with the
ability to offer the services described or that we will be able to successfully
manage or integrate any resulting business. Consequently, we may not achieve
anticipated revenue and cost benefits.
We do not currently have a substantial customer base and our revenues will
initially come from a few payers in one geographic market
We do not currently have a substantial customer base. In addition, we
expect that initially we will generate a significant portion of our revenue
from providing our products and services in the New York metropolitan area and
from a small number of payers. If we do not generate as much revenue in this
market or from these payers as we expect, our revenue will be significantly
reduced which would have a material adverse effect on our business, financial
condition and results of operations.
9
<PAGE>
We may face significant competition in providing healthcare e-commerce products
and services
The market for healthcare e-commerce services is rapidly developing and
is becoming increasingly competitive. Several service companies, some of which
may have greater financial, technological and marketing resources than we do,
have announced that they are developing a combination of one or more healthcare
e-commerce services that may be competitive with ours. We expect to compete
with various industry participants, including software vendors, emerging e-
commerce companies and electronic data interchange providers, who operate
networks used for electronic communication of business transactions such as
orders, confirmations and invoices between organizations. These networks are
often referred to as EDI networks. Some of our competitors have services that
are currently in operation.
Traditional healthcare software vendors such as Medic and IDX primarily
focus on the administrative functions in the healthcare setting. Electronic
data interchange network providers and claims clearinghouses like Envoy, which
was recently acquired by Quintiles Transnational, and NDC provide connectivity
to edit and transmit data on medical and pharmacy claims. These companies are
beginning to offer services which may be competitive with our clinical e-
commerce services. Companies like Healtheon and other emerging e-commerce
companies may offer a range of services which may compete with ours. Any
organizations that create stand-alone healthcare software products may migrate
into the healthcare e-commerce business. Our competitors may be first to market
new services or may also independently develop services and/or technology that
is substantially equivalent to or superior to ours. There can be no assurance
that such companies will not develop and successfully market healthcare e-
commerce products and services in a manner which would have a material adverse
effect on our business, financial condition and results of operations.
We may experience significant delays in generating revenues from our services
because potential customers could take a long time to evaluate the purchase of
our services
A key element of our strategy is to market our services directly to large
healthcare organizations. We do not control many of the factors that will
influence physicians', payers' and suppliers' buying decisions. We expect that
the sales and implementation process will be lengthy and will involve a
significant technical evaluation and commitment of capital and other resources
by physicians, payers and suppliers. The sale and implementation of our
services are subject to delays due to physicians', payers' and suppliers'
internal budgets and procedures for approving large capital expenditures and
deploying new technologies within their networks.
Rapidly changing technology may impair our ability to develop and market our
services
All businesses which rely on Internet technology, including the
healthcare e-commerce business that we are developing, are subject to, among
other risks and uncertainties:
. rapid technological change;
. changing customer needs;
. frequent new product introductions; and
. evolving industry standards.
Internet technologies are evolving rapidly, and the technology used by
any e-commerce business is subject to rapid change and obsolescence. These
market characteristics are exacerbated by the emerging nature of the market and
the fact that many companies are expected to introduce new Internet products
and services in the near future. In addition, use of the Internet may decrease
if alternative protocols are developed or if problems associated with increased
Internet use are not resolved. As the communications, computer and software
industries continue to experience rapid technological change, we must be able
to quickly and successfully modify our services so that they adapt to such
changes. We cannot assure you that we will not experience difficulties that
could delay or prevent the successful development and introduction of our
10
<PAGE>
healthcare e-commerce services or that we will be able to respond to
technological changes in a timely and cost-effective manner. Moreover,
technologically superior products and services could be developed by
competitors. These factors could have a material adverse effect upon our
business, financial condition and results of operations.
We currently have no patents and may be unable to adequately protect our
proprietary rights
Our future success and ability to compete in the healthcare e-commerce
business may be dependent in part upon our proprietary rights to products and
services which we develop. We expect to rely on a combination of patent,
copyright, trademark and trade secret laws and contractual restrictions to
protect our proprietary technology and to rely on similar proprietary rights of
any of our content and technology providers. We currently have no patents
covering any of our technology, whereas some of our competitors have patents
which may cover some aspects of their technology. We intend to file patent
applications to protect certain of our proprietary technology. We cannot assure
you that such applications will be approved or, if approved, will be effective
in protecting our proprietary technology. We enter into confidentiality
agreements with all of our employees, as well as with our clients and potential
clients seeking proprietary information, and limit access to and distribution
of our software, documentation and other proprietary information. There can be
no assurance that the steps we take or the steps such providers take would be
adequate to prevent misappropriation of our respective proprietary rights.
We may be subject to substantial claims if we infringe upon the proprietary
rights of third parties
We expect that we could be subject to intellectual property infringement
claims as the number of our competitors grows and the functionality of our
applications overlaps with competitive offerings. Although we intend to take
steps to minimize the likelihood that we are infringing the proprietary rights
of any third parties, we cannot assure you that patent infringement or other
similar claims will not be asserted against us or one of our content or
technology providers or that such claims will not be successful. We could incur
substantial costs and diversion of management resources with respect to the
defense of any such claims. Furthermore, parties making such claims against us
or a content or technology provider could secure a judgment awarding
substantial damages, as well as injunctive or other equitable relief which
could effectively block our ability to provide products or services in certain
of our markets. Such a judgment could have a material adverse effect on our
business, financial condition and results of operations. In addition, we cannot
assure you that licenses for any intellectual property of third parties that
might be required for our products or services will be available on
commercially reasonable terms, or at all.
Litigation by Merck & Co., Inc. and Merck-Medco Managed Care, L.L.C. against
our company
On February 18, 1999, Merck & Co., Inc. and Merck-Medco Managed Care,
L.L.C. filed a complaint in the Superior Court of New Jersey against our
company, Synetic, Martin J. Wygod, Chairman of our company and Synetic, and
three officers and/or directors of our company and Synetic, Paul C. Suthern,
Roger C. Holstein and Charles A. Mele. The plaintiffs assert that our company,
Synetic and the individual defendants are in violation of certain non-
competition, non-solicitation and other agreements with Merck and Merck-Medco,
and seek to enjoin us and them from conducting our healthcare e-commerce
business and from soliciting Merck-Medco's customers. The Synetic and Wygod
agreements provide an expiration date of May 24, 1999. The other individuals'
agreements provide for expiration in December 1999, in the case of Mr. Suthern,
March 2000, in the case of Mr. Mele, and September 2002, in the case of Mr.
Holstein.
A hearing was held on March 22, 1999 on an application for a preliminary
injunction filed by Merck and Merck-Medco. On April 15, 1999, the Superior
Court denied this application. We believe that Merck's and Merck-Medco's
positions in relation to us and the individual defendants are without merit and
we intend to vigorously defend the litigation. However, the outcome of complex
litigation is uncertain and cannot be
11
<PAGE>
predicted at this time. Any unanticipated adverse result could have a material
adverse effect on our company's financial condition and results of operations.
Our business will suffer if we fail to deal effectively with Year 2000
technology risks
We are not currently aware of any Year 2000 compliance problems relating
to our information technology or non-information technology systems that we
believe would have a material adverse effect on our business, financial
condition and results of operations. There can be no assurance that we will not
discover Year 2000 compliance problems that will require substantial revisions
to our systems, products or services. In addition, there can be no assurance
that third-party software, hardware or services incorporated into our material
information technology and non-information technology systems will not need to
be revised or replaced, all of which could be time consuming and expensive. Any
failure to fix our information technology systems or to replace third-party
software, hardware or services on a timely basis could result in lost revenues,
increased operating costs, the loss of customers and other business
interruptions, any of which could have a material adverse effect on our
business, results of operations and financial condition.
In addition, there can be no assurance that physicians, payers,
suppliers, Internet access companies, third-party service providers, vendors,
business partners and others outside our control will be Year 2000 compliant.
The failure by such entities to be Year 2000 compliant could result in a
systemic failure beyond our control, such as a prolonged Internet or
communications failure, which could also prevent us from delivering our
services to customers, decrease the use of the Internet or prevent users from
accessing our service. Such a failure could have a material adverse effect on
our business, results of operations and financial condition. Also, a general
Year 2000 systemic failure could require healthcare companies to spend large
amounts of money to correct any such failures, reducing the amount of money
that might otherwise be available to be spent on services such as ours.
As the Year 2000 issue has many elements and potential consequences, some
of which are not reasonably foreseeable, the ultimate impact of the Year 2000
on our operations could differ materially from our expectations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000."
Our business will suffer if the integrity and security of our systems is
inadequate
We believe that once we begin to deliver our healthcare e-commerce
services, our business could be harmed if we or our present or future customers
were to experience any system delays, failures or loss of data. We currently
intend to initially process substantially all our customer transactions and
data at our facilities in Cambridge, Massachusetts. Although we intend to have
safeguards for emergencies, the occurrence of a catastrophic event or other
system failure at our facilities could interrupt our operations or result in
the loss of stored data. In addition, we will depend on the efficient operation
of Internet connections from customers to our systems. These connections, in
turn, depend on the efficient operation of Web browsers, Internet service
providers and Internet backbone service providers. In the past, Internet users
have occasionally experienced difficulties with Internet and online services
due to system failures. Any disruption in Internet access provided by third
parties could have a material adverse effect on our business, results of
operations and financial condition. Furthermore, we will be dependent on
hardware suppliers for prompt delivery, installation and service of equipment
used to deliver our services.
Despite the implementation of security measures, our infrastructure may
be vulnerable to damage from physical break-ins, computer viruses, programming
errors, attacks by hackers or similar disruptive problems. A material security
breach could damage our reputation or result in liability to us. We will retain
confidential customer and patient information in our processing center. An
experienced computer user who is able to access our computer systems could gain
access to confidential patient and company information. Furthermore, we may not
have a timely remedy to secure our system against any hacker who has been able
to penetrate our system.
12
<PAGE>
Therefore, it is critical that our facilities and infrastructure remain and are
perceived by the marketplace to be secure. The occurrence of any of these
events could result in the interruption, delay or cessation of service, which
could have a material adverse effect on our business, results of operations and
financial condition.
A significant barrier to electronic commerce and communications are the
issues presented by the secure transmission of confidential information over
public networks. We will rely on encryption and authentication technology
licensed from third parties to secure Internet transmission of and access to
confidential information. There can be no assurance that advances in computer
capabilities, new discoveries in the field of cryptography, or other events or
developments will not result in a compromise or breach of the methods we will
use to protect customer transaction data. A party who is able to circumvent our
security measures could misappropriate or alter proprietary information or
cause interruptions in our operations. If any such compromise of our security
or misappropriation of proprietary information were to occur, it could have a
material adverse effect on our business, financial condition, and results of
operations. We may be required to expend significant capital and other
resources to protect against such security breaches or to alleviate problems
caused by security breaches. We may also be required to spend significant
resources and encounter significant delays in upgrading our systems to
incorporate more advanced encryption and authentication technology as it
becomes available. Concerns over the security of the Internet and other online
transactions and the privacy of users may also inhibit the growth of the
Internet and other online services generally, and our services in particular,
especially as a means of conducting commercial and/or healthcare-related
transactions. There can be no assurance that our security measures will prevent
security breaches or that failure to prevent such security breaches will not
have a material adverse effect on our business, prospects, financial condition,
and results of operations.
Our operations will also be dependent on the development and maintenance
of software. Although we intend to use all necessary means to ensure the
efficient and effective development and maintenance of software, both
activities are extremely complex and thus frequently characterized by
unexpected problems and delays.
We will need to expand our management information systems and personnel to meet
the increased demands of our business
Although our existing management information systems are sufficient to
meet our current needs, we intend to acquire new systems to meet the
requirements of our expanded operations. These systems need, among other
requirements, to capture complex information. There can be no assurance that
these new management information systems, when installed, will be sufficient to
meet our needs. In addition, we may experience interruptions of service when we
transition from our existing systems to new ones. Our ability to achieve our
financial and operational objectives also depends on our ability to continue to
hire, retain and motivate highly qualified technical and customer support
personnel. A competitive environment exists for qualified personnel and we
cannot assure you that we will be able to expand our personnel to meet any
increased demands of our business.
Government regulation of the Internet or healthcare e-commerce services could
adversely affect our business
Our services may be subject to extensive and frequently changing
regulation at federal, state and local levels. The Internet and its associated
technologies are also subject to government regulation. Many existing laws and
regulations, when enacted, did not anticipate the methods of healthcare e-
commerce we are developing. We believe, however, that these laws and
regulations may nonetheless be applied to our healthcare e-commerce business.
Accordingly, our healthcare e-commerce business may be affected by current
regulations as well as future regulations specifically targeted to this new
segment of the healthcare industry.
13
<PAGE>
We expect to conduct our healthcare e-commerce business in substantial
compliance with all material federal, state and local laws and regulations
governing our operations. However, the impact of regulatory developments in the
healthcare industry is complex and difficult to predict, and there can be no
assurance that we will not be materially adversely affected by existing or new
regulatory requirements or interpretations. It is also possible that such
requirements or interpretations could limit the effectiveness of the use of the
Internet for the methods of healthcare e-commerce we are developing or even
prohibit the sale of one or more of our services. Application of any such
regulations or requirements to our business could have a material adverse
effect on our business, financial condition or results of operations. See
"Business--Government Regulation."
Changes in the regulatory and economic environment and consolidation in the
healthcare industry could adversely affect our business
The healthcare industry is highly regulated and is subject to changing
political, economic and regulatory influences. These factors affect the
purchasing practices and operation of healthcare organizations. Changes in
current healthcare financing and reimbursement systems could cause us to make
unplanned enhancements of applications or services, or result in delays or
cancellations of orders or in the revocation of endorsement of our services by
healthcare participants. Federal and state legislatures have periodically
considered programs to reform or amend the U.S. healthcare system at both the
federal and state level. These programs may contain proposals to increase
governmental involvement in healthcare, lower reimbursement rates or otherwise
change the environment in which healthcare industry participants operate.
Healthcare industry participants may respond by reducing their investments or
postponing investment decisions, including investments in our services. We do
not know what effect any of these proposals would have on our business.
Many healthcare industry participants are consolidating to create
integrated healthcare delivery systems with greater market power. As the
healthcare industry consolidates, competition to provide products and services
to industry participants will become more intense and the importance of
establishing a relationship with each industry participant will become greater.
These industry participants may try to use their market power to negotiate
price reductions for our products and services. If we were forced to reduce our
prices, our operating results could suffer if we cannot achieve corresponding
reductions in our expenses.
Our company will be controlled by Synetic and Synetic will be able to elect all
directors and approve all corporate transactions; this relationship may give
rise to conflicts of interest
Immediately prior to the offering, Synetic was the indirect owner of
80.1% of our outstanding common stock. Upon completion of the offering and the
concurrent private sale of 600,000 shares of our common stock to Cerner,
Synetic will own approximately 72.8% of our outstanding common stock and will
therefore retain effective control of our company and will be able to control
the vote on matters submitted to our stockholders and will also be able to
elect all of our directors. In addition, the majority of our directors and
officers are also directors or officers of Synetic and may have conflicts of
interest with respect to certain transactions that may affect our company, such
as transactions involving business dealings between our company and Synetic,
acquisition opportunities, the issuance of additional shares of our common
stock and other matters involving conflicts which cannot now be foreseen.
Officers and directors of our company also beneficially own and have been
granted options to purchase shares of Synetic common stock.
The level of ownership of our outstanding common stock by Synetic may
have the effect of discouraging or making more difficult, absent the support of
Synetic, a proxy contest, a merger involving our company, a tender offer, an
open-market purchase program or other purchases of our common stock that could
give our stockholders the opportunity to realize a premium over the then-
prevailing market price of their shares of common stock. See "Transactions and
Relationships with Principal Stockholders."
14
<PAGE>
We may need to obtain future capital
We expect that the money generated from this offering, combined with our
current cash resources, will be sufficient to meet our requirements for
approximately 18 months. However, we may need to raise additional financing to
support expansion, develop new or enhanced applications and services, respond
to competitive pressures, acquire complementary businesses or technologies or
take advantage of unanticipated opportunities. We may need to raise additional
funds by selling debt or equity securities, by entering into strategic
relationships or through other arrangements. However, there can be no assurance
that we will be able to raise any additional amounts on reasonable terms, or at
all, when they are needed.
Future sales of shares of our common stock could affect our stock price
Prior to this offering, there has been no public market for our common
stock. No information is currently available and no prediction can be made as
to the timing or amount of future sales of shares, or the effect, if any, that
market sales of shares or the availability of shares for sale will have on the
market price prevailing from time to time. Nevertheless, sales of substantial
amounts of our common stock, including shares issuable upon exercise of stock
options or warrants, in the public market after the lapse of the legal and
contractual restrictions, including lock-up agreements, described below, or the
perception that such sales may occur, could materially and adversely affect the
prevailing market prices for our common stock and our ability to raise equity
capital in the future. See "Shares Eligible for Future Sale."
As a result of legal and contractual restrictions as described under the
caption "Shares Eligible for Future Sale," additional shares will be available
for sale in the public market as follows:
. no shares of common stock, other than those sold hereby and not
held by affiliates, will be available for immediate sale in the
public market on the date of this prospectus,
. any shares of common stock sold hereby and purchased by affiliates
will be eligible for sale 90 days after the date of this
prospectus, subject to the volume, manner of sale and reporting
requirements of Rule 144,
. approximately 50,062,500 shares of common stock, all of which are
held by Synetic, will be eligible for sale upon expiration of the
lock-up agreements days after the date of this prospectus,
subject to the volume, manner of sale and reporting requirements
of Rule 144,
. approximately 12,437,500 shares of common stock acquired by Cerner
prior to this offering will be eligible for sale, subject to the
volume, manner of sale and reporting requirements of Rule 144,
after January 2, 2000. These shares may also be sold pursuant to
Cerner's registration rights after January 2, 2001, if not
previously sold pursuant to Rule 144 or another exemption from
registration under the Securities Act, and
. the 600,000 shares of our common stock purchased by Cerner in the
private transaction concurrent with this offering will be eligible
for sale days after the date of this prospectus, upon expiration
of certain contractual restrictions, subject to the volume, manner
of sale and reporting requirements of Rule 144.
In addition, THINC and Cerner own warrants exercisable for an aggregate
of 4,866,882 shares of our common stock, which warrants cannot be exercised
until 180 days after the completion of this offering. We will also issue to
Cerner approximately 2,503,125 shares of our common stock on or after February
15, 2001 at a price of $.01 per share if we realize specified levels of
physician usage of our services.
We plan to file a registration statement to register shares of common
stock reserved for issuance under our stock option plans. See "Management --
Compensation Pursuant to Plans and
15
<PAGE>
Arrangements of the Company -- Stock Option Plans." Once registered, persons
acquiring such shares upon exercise of their options, whether or not they are
affiliates, will be permitted to resell their shares in the public market
without regard to the Rule 144 holding period.
There has been no public market for our common stock
Prior to this offering, there has been no public market for our common
stock. We have filed an application to list the common stock for trading on the
Nasdaq National Market System. We do not know the extent to which investor
interest in our company will lead to the development of a trading market for
the common stock or how the common stock will trade in the future. Our company
and the underwriters will negotiate to determine the initial public offering
price. You may not be able to resell your shares at or above the initial public
offering price due to a number of factors, including:
. actual or anticipated quarterly variations in our operating
results;
. changes in expectations as to our future financial performance or
changes in financial estimates, if any, of securities analysts;
. announcements of new products or services or technological
innovations;
. announcements relating to strategic relationships;
. customer relationship developments;
. conditions generally affecting the Internet or healthcare
industries;
. success of our operating strategy;
. competition from healthcare information software vendors,
healthcare electronic data interchange network companies,
nationwide and regional providers of information technology
consulting services and new technology; and
. the operating and stock price performance of other comparable
companies.
The price for our common stock may be volatile
The stock market recently has experienced significant volatility that
often has been unrelated or disproportionate to the operating performance of
particular companies. These broad market and industry fluctuations may
adversely affect the trading price of our common stock, regardless of our
actual operating performance.
You will suffer substantial dilution and our current stockholders will benefit
from this offering
New investors in this offering will experience an immediate and
substantial dilution of $ per share, assuming an initial public offering
price of $15.00 per share. This offering will also create a public market for
the resale of shares held by existing investors, and substantially increase the
market value of those shares. In addition, the issuance by our company of
additional securities, including common stock or securities convertible into
common stock, the exercise of warrants currently held by Cerner and THINC, or
the exercise of employee stock options or officer stock options, could result
in substantial dilution of the percentage ownership of our stockholders at the
time of any such issuance and substantial dilution of our company's earnings
per share. See "Dilution."
16
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
This prospectus contains forward-looking statements relating to our
operations that are based on management's current expectations, estimates and
projections about our company, and the healthcare e-commerce industry. Words
such as "expects," "intends," "plans," "projects," "believes," "estimates,"
"anticipates" and variations of these words and similar expressions are used to
identify such forward-looking statements. These statements are not guarantees
of future performance and involve certain risks, uncertainties and assumptions
that are difficult to predict. Further, certain forward-looking statements are
based upon assumptions as to future events that may not prove to be accurate.
Therefore, actual outcomes and results may differ materially from what is
expressed or forecast in such forward-looking statements. We undertake no
obligation, and do not intend, to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
A number of important factors could cause actual results to differ materially
from those indicated by such forward-looking statements. Such factors include
those set forth in this prospectus under the heading "Risk Factors."
USE OF PROCEEDS
We estimate the net proceeds from the sale of 5,650,000 shares of common
stock in connection with this offering will be approximately $ million
based on an assumed initial public offering price of $15.00 per share. We
estimate the net proceeds will be approximately $ million if the
underwriters' over-allotment option is exercised in full. In addition, we
estimate the net proceeds from the sale of shares of common stock to Cerner in
a separate, concurrent private transaction will be approximately $ million.
We currently intend to use the net proceeds from this offering and the private
sale to Cerner for working capital, including financing the cost of product
development and deployment, increased sales and marketing activities, and for
general corporate purposes. We may use a portion of the net proceeds to fund,
acquire or invest in complementary businesses or technologies, although we have
no present commitments with respect to any acquisition or investment.
Pending use of the net proceeds of the offering, we intend to invest such
proceeds in U.S. government or investment-grade marketable securities.
DIVIDEND POLICY
We currently intend to retain any earnings to finance the development and
expansion of our business and do not anticipate paying any cash dividends in
the foreseeable future. Any declaration and payment of dividends would be
subject to the discretion of our board of directors. Any future determination
to pay dividends will depend on our results of operations, financial condition,
capital requirements, contractual restrictions and other factors deemed
relevant at the time by the board of directors.
17
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1999 the actual
capitalization of our company and the as adjusted capitalization of our company
after giving effect to the receipt of the estimated net proceeds from the sale
of the 5,650,000 shares of common stock offered to the public hereby at the
assumed initial public offering price of $15.00 per share, after deducting
underwriting discounts and commissions and the estimated offering expenses, and
the concurrent sale by us of 600,000 shares of common stock Cerner has agreed
to purchase directly from us in a separate, concurrent private transaction.
<TABLE>
<CAPTION>
March 31, 1999
(in thousands)
(unaudited)
-----------------
As
Actual Adjusted
------- --------
<S> <C> <C>
Cash and cash equivalents................................ $ 5,058 $
======= =======
Stockholders' equity:
Preferred Stock, $.01 par value, 30,000,000 shares
authorized; none issued and outstanding............... -- --
Common stock, $.01 par value, 300,000,000 shares
authorized; 62,500,000 shares issued and outstanding;
68,750,000 issued and outstanding as adjusted (1)..... 625
Paid-in capital........................................ 108,798
Deficit accumulated during the development stage....... (68,173) (68,173)
------- -------
Total stockholders' equity............................ 41,250
------- -------
Total capitalization................................. $41,250 $
======= =======
</TABLE>
- --------
(1) Excludes shares of common stock which may be issued upon the exercise
of options outstanding on the date of this prospectus granted pursuant to
our employee stock option plan or our officer stock option plan and an
additional shares of common stock reserved for issuance pursuant to
these plans. The weighted average exercise price of all options outstanding
on the date of this prospectus is the initial public offering price per
share. Also excludes an aggregate of 4,866,882 shares of common stock which
may be issued from time to time upon the exercise of the THINC and Cerner
warrants and 2,503,125 shares of common stock which will be issued on or
after February 15, 2001 to Cerner at a price of $.01 per share if we
realize a specified level of physician usage of our services. See
"Management," "Security Ownership of Management" and "Transactions and
Relationships with Principal Stockholders."
18
<PAGE>
DILUTION
As of March 31, 1999, our net tangible book value was $9,920,000 or $.16
per share. After giving effect to the sale of 5,650,000 shares offered to the
public hereby at an assumed initial public offering price of $15.00 per share,
after deducting the underwriting discount and estimated offering expenses, and
after giving effect to the concurrent, private sale by us of 600,000 shares of
common stock to Cerner, our pro forma as adjusted net tangible book value as of
March 31, 1999 would have been approximately $ or $ per share. This
represents an immediate increase in net tangible book value of $ per share
to the existing stockholders and an immediate dilution of $ per share to
new investors. The following table illustrates this per share dilution.
<TABLE>
<CAPTION>
Per Share
---------
<S> <C> <C>
Initial public offering price per share................... $
Net tangible book value before the offering(1).......... $
Increase attributable to new investors.................. $
Pro forma net tangible book value after the offering(2)... $
Dilution per share to new investors(3).................... $
</TABLE>
- --------
(1) Net tangible book value, which consists of tangible assets less total
liabilities, of our company divided by the number of shares of common stock
outstanding as of March 31, 1999.
(2) After giving effect to the private sale of 600,000 shares of our common
stock to Cerner at a price of $ per share, concurrently with this
offering, pro forma net tangible book value will be $ .
(3) After giving effect to the private sale of 600,000 shares of our common
stock to Cerner concurrently with this offering, dilution per share to new
investors in this offering will be $ . In addition, the underwriters'
over-allotment option is exercised in full, the dilution per share to new
investors will be $ per share.
The following table summarizes, on the pro forma basis set forth above,
as of March 31, 1999, the relative investment of the existing stockholders, new
investors and Cerner.
<TABLE>
<CAPTION>
Total Cash
Shares Purchased Consideration
------------------ -------------- Average Price
Number Percent Amount Percent per Share
-------- -------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders....... $
New Investors in this
offering...................
Cerner in a concurrent
private transaction........
-------- -------- ----- -----
Total................... 100.0% 100.0% $
</TABLE>
The above computations do not include shares of common stock which
may be issued upon the exercise of options outstanding on the date of this
prospectus granted pursuant to our employee stock option plan or our officer
stock option plan and an additional shares of common stock reserved for
issuance pursuant to these plans. We expect to grant to certain of our officers
and employees, effective as of the date of this prospectus, options to purchase
an aggregate of approximately of these shares at an exercise price equal to
the initial public offering price per share. See "Management." These
computations also do not include 4,866,882 shares of common stock that may be
issued from time to time upon the exercise of the warrants held by THINC and
Cerner and 2,503,125 shares of common stock which may be issued on or after
February 15, 2001 to Cerner at a price of $.01 per share if our business
realizes certain performance levels.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(in thousands, except share data)
The selected financial data for our company set forth below as of June
30, 1997 and June 30, 1998 and for the period from Inception (December 24,
1996) through June 30, 1997 and for the year ended June 30, 1998 have been
derived from our audited consolidated financial statements included elsewhere
in this prospectus. The selected financial data related to the statement of
operations for the predecessor business of Avicenna Systems Corporation set
forth below for the year ended December 31, 1995, for the period January 1,
1996 through December 23, 1996 and for the cumulative period from Inception
(September 20, 1994) through December 23, 1996 of Avicenna Systems Corporation
have been derived from the audited financial statements of Avicenna Systems
Corporation included elsewhere in this prospectus. The selected financial data
for the predecessor business of Avicenna Systems Corporation set forth below
for the period from Inception (September 20, 1994) through December 31, 1994
and all the balance sheet data of Avicenna Systems Corporation have been
derived from the audited financial statements of Avicenna Systems Corporation
not included in this prospectus. The selected financial data for our company as
of March 31, 1999, for the nine-month periods ended March 31, 1998 and 1999 and
for the cumulative period from Inception (December 24, 1996) through March 31,
1999 are derived from our unaudited consolidated financial statements which, in
the opinion of our management, include all normal and recurring adjustments
necessary to present fairly the financial position and the results of
operations of our company for those periods. The operating results for the nine
months ended March 31, 1999 are not necessarily indicative of the operating
results to be expected for the full year. The selected financial data presented
below should be read in conjunction with the financial statements and notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for both our company and the predecessor business of
Avicenna Systems Corporation included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Avicenna Systems Corporation
Predecessor Business CareInsite, Inc.
--------------------------------------- -----------------------------------------------------------
Period Cumulative Period Nine Cumulative
from Period from from months from
inception from inception inception ended inception
(9/20/94) Year 01/01/96 (09/20/94) (12/24/96) Year March 31, (12/24/96)
through ended through through through ended ----------------- through
12/31/94 12/31/95 12/23/96 12/23/96 06/30/97 06/30/98 1998 1999 03/31/99
--------- -------- -------- ---------- ---------- -------- ------- -------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Service revenue (related
party)................. $ -- $ -- $ 20 $ 20 $ -- $ -- $ -- $ 213 $ 213
Cost of services
(related party)........ -- -- -- -- -- -- -- 213 213
Costs & expenses
Research &
development........... 16 86 1,161 1,263 7,652 4,762 3,976 8,720(/1/) 21,134(/1/)
Sales & marketing...... 9 12 1,297 1,318 1,150 1,733 1,232 1,427 4,310
General &
administrative........ 7 69 860 936 1,379 3,887 2,589 2,944 8,210
Litigation costs....... -- -- -- -- -- -- -- 2,500(/2/) 2,500(/2/)
Other income, net...... -- -- -- -- (9) (47) (7) (110) (166)
Acquired in-process
research &
development........... -- -- -- -- 32,185(/3/) -- -- -- 32,185(/3/)
------ ------ ------- ------- -------- -------- ------- -------- --------
Total costs &
expenses............ 32 167 3,318 3,517 42,357 10,335 7,790 15,694 68,386
------ ------ ------- ------- -------- -------- ------- -------- --------
Net loss................ $ (32) $ (167) $(3,298) $(3,497) $(42,357) $(10,335) $(7,790) $(15,481) $(68,173)
Preferred stock
dividends.............. -- -- (241) (241) -- -- -- -- --
Net loss applicable to
common stockholders.... $ (32) $ (167) $(3,539) $(3,738) $(42,357) $(10,335) $(7,790) $(15,481) $(68,173)
====== ====== ======= ======= ======== ======== ======= ======== ========
Basic and diluted net
loss per share
applicable to common
stockholders........... $(0.08) $(0.44) $ (9.34) $ (9.86) $ (0.85) $ (0.21) $ (0.16) $ (0.29) $ (1.33)
Weighted average shares
outstanding
(basic & diluted)...... 379 379 379 379 50,063 50,063 50,063 54,208 51,444
</TABLE>
(Footnotes on following page)
20
<PAGE>
<TABLE>
<CAPTION>
Avicenna Systems Corporation
Predecessor Business CareInsite, Inc.
--------------------------------- ------------------------------
12/31/94 12/31/95 12/23/96 06/30/97 06/30/98 03/31/99
--------- --------- ---------- -------- -------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (defi-
cit)................... $ (32) $ 998 $ (1,257) $(1,592) $ 775 $ 4,342
Total assets............ -- 1,201 1,263 3,476 10,833 43,935
Stockholders' equity
(deficit).............. (32) (206) (3,744) 1,566 7,798 41,250
</TABLE>
- --------
(1) As a result of obtaining a license to the Cerner technology, certain
software that we previously capitalized was deemed duplicative and obsolete
and had no alternative future use. Consequently, approximately $2,381,000
of capitalized software costs were written off and included in expenses.
(2) Represents charges relating to expenses incurred in conjunction with the
Merck litigation in the quarter ended March 31, 1999. See "Risk Factors --
Litigation by Merck & Co., Inc. and Merck-Medco Managed Care, L.L.C.
against our company."
(3) Represents a non-recurring charge related to the write-off of acquired in-
process research and development costs in conjunction with the purchase of
Avicenna Systems Corporation and CareAgents, Inc.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and notes thereto. The following discussion contains forward-looking
statements that reflect our plans, estimates and beliefs. Our actual results
could differ materially from those discussed in forward-looking statements. See
"Risk Factors."
Overview
Our healthcare e-commerce services are still under development and no
revenues have been generated from the sale of these services. Additionally, the
market for our products and services is unproven. These factors make it
difficult to evaluate our business and prospects. We have incurred substantial
operating losses since our inception and there can be no assurance that we will
generate significant revenues or profitability in the future. We intend to
significantly increase our expenditures primarily in the areas of development,
sales and marketing, data center operations and customer support. As a result,
we expect to incur substantial operating losses for at least the next two
fiscal years.
We expect to generate a significant portion of our revenue from payers
and suppliers who are expected to pay initial set-up and ongoing maintenance
fees associated with organizing, loading and maintaining their content,
transaction fees for the transmission of payer content to physicians and
transaction fees for lab orders/results and prescription routing. We also
expect to generate revenue from physicians who are expected to pay a monthly
fee for access to a range of our services.
We believe that management has a unique understanding of the economic
leverage inherent in facilitating the automation of certain clinical,
administrative and financial processes. Accordingly, our company also intends
to contract with payers and suppliers to guarantee them incremental cost
savings from the use of certain of our services. In some cases, we intend to
share in any cost savings in excess of the guaranteed cost savings. The amount
and timing of transaction revenue generated under these arrangements may be
impacted by our guarantee of cost savings.
On December 24, 1996, Synetic acquired Avicenna Systems Corporation, a
privately held company that marketed and built Intranets for managed healthcare
plans, integrated healthcare delivery systems and hospitals. The acquisition of
Avicenna marked the inception of Synetic's healthcare electronic commerce
business. On January 23, 1997 Synetic acquired CareAgents, Inc., a privately
held company engaged in developing Internet-based clinical commerce
applications. On November 24, 1998, Synetic formed CareInsite, Inc. (formerly
Synetic Healthcare Communications, Inc.). On January 2, 1999, Synetic
contributed the stock of CareAgents to Avicenna. Concurrently, Avicenna
contributed the stock of CareAgents and substantially all of Avicenna's other
assets and liabilities to our company. Synetic continues to hold its interest
in our company through Avicenna. Synetic has also contributed $10,000,000 in
cash to our company. The transactions resulting in our formation have been
accounted for using the carryover basis of accounting and our company's
financial statements include the accounts and operations of Avicenna and
CareAgents for all periods presented from the date each entity was acquired. In
October, 1998, we entered into agreements in principle with THINC and Cerner.
Definitive agreements with THINC and Cerner were entered into in January 1999.
Results of Operations -- CareInsite
Nine Months Ended March 31, 1999 Compared to Nine Months Ended March 31, 1998
Service revenue (related party) of $213,000 consisted of management
services which we provided to THINC pursuant to the CareInsite/THINC operating
agreement effective in January 1999.
22
<PAGE>
Cost of services (related party) of $213,000 consisted primarily of
employee compensation and benefits expense for those employees directly
supporting the THINC business.
Research and development expenses consist primarily of employee
compensation, the cost of consultants and other direct expenses incurred in the
development of our product. These expenses were $8,720,000 for the nine months
ended March 31, 1999 and $3,976,000 for the nine months ended March 31, 1998.
Research and development expenses for the nine months ended March 31, 1999
include a $2,381,000 write-off of capitalized software costs relating to
components of our existing software which were deemed duplicative and obsolete
and had no alternative future use with the functionality obtained through the
license of several components of Cerner's technology. Excluding this write-off
of capitalized software, total expenditures for research and development,
including amounts capitalized, were $14,108,000 for the nine months ended March
31, 1999 and $6,516,000 for the nine months ended March 31, 1998. The increase
in total expenditures was related to the purchase of third party licenses, as
well as increases in development personnel and outside consultants. Of the
total expenditures, $7,769,000 was capitalized during the nine months ended
March 31, 1999 and $2,540,000 was capitalized during the nine months ended
March 31, 1998. Our policy is to capitalize software development costs once
technological feasibility has been established.
Sales and marketing expenses consist primarily of salaries and benefits,
travel for sales, marketing and business development personnel, and promotion
related expenses such as advertising, marketing materials, and tradeshows.
Sales and marketing expenses were $1,427,000 for the nine months ended March
31, 1999 and $1,232,000 for the nine months ended March 31, 1998. The increase
reflects the addition of payer oriented marketing staff partially offset by the
elimination of the remaining advertising and Intranet sales and marketing
personnel. Included in sales and marketing expenses are charges from Synetic of
$494,000 for the nine months ended March 31, 1999 and $422,000 for the nine
months ended March 31, 1998. These charges represent an allocation of
compensation costs for Synetic's personnel who devote a majority of their time
to our company, and primarily relate to business development and marketing
support services.
General and administrative expenses consist primarily of compensation for
legal, finance, management and administrative personnel. General and
administrative expenses were $2,944,000 for the nine months ended March 31,
1999 and $2,589,000 for the nine months ended March 31, 1998. The increase in
general and administrative expenses of $355,000 resulted primarily from
increased costs associated with supporting the growth in our research and
development efforts. Included in general and administrative expenses are
charges from Synetic of $253,000 for the nine months ended March 31, 1999 and
$141,000 for the nine months ended March 31, 1998. These charges represent an
allocation of compensation costs for Synetic's personnel who devote a majority
of their time to our company, and primarily relate to administrative and legal
services. The increase in these allocated expenses is due to increased staffing
to support our business. We expect to hire additional personnel and incur
additional costs related to becoming a public company. Accordingly, we intend
to increase the absolute dollar level of general and administrative expenses in
future periods.
We recorded $2,500,000 in litigation charges for the nine months ended
March 31, 1999, related to our ongoing defense against assertions that we
violated certain agreements with Merck & Co., Inc. and Merck-Medco Managed
Care, L.L.C. See "Risk Factors -- Litigation by Merck & Co., Inc., and Merck-
Medco Managed Care, L.L.C. against our company."
Year Ended June 30, 1998 Compared to Period from Inception (December 24, 1996)
Through June 30, 1997
Research and development expenses were $4,762,000 for the year ended June
30, 1998 and $7,652,000 and for the period from inception (December 24, 1996)
through June 30, 1997. Total expenditures for research and development,
including amounts capitalized, were $9,386,000 for the year ended June 30, 1998
and $8,000,000 and for the period from inception (December 24, 1996) through
June 30, 1997. The increase in total expenditures was primarily due to the
longer fiscal period and a significant increase in research and development
personnel. This increase was partially offset by the write-off of $5,228,000 in
costs associated
23
<PAGE>
with the acquisitions of rights to certain intellectual property and software
technologies in the period from Inception (December 24, 1996) through June 30,
1997 for which there was no comparable write-off for the year ended June 30,
1998. This write-off primarily related to payments for a royalty-free perpetual
license for pharmacy -- and prescription -- related software applications,
together with the supporting documentation. We licensed these assets for use in
developing certain components of our computer applications. As we had not
established the technological feasibility of our applications prior to the date
the license was acquired, and there was no alternative future use of the
licensed technology, the entire cost was charged to research and development
expense. Research and development costs capitalized for the year ended June 30,
1998 and for the period from inception (December 24, 1996) through June 30,
1997 were $4,624,000 and $348,000, respectively.
Sales and marketing expenses were $1,733,000 for the year ended June 30,
1998 and $1,150,000 for the period from inception (December 24, 1996) through
June 30, 1997. The increase reflects the impact of the longer fiscal period
partially offset by a reduction in advertising and Intranet sales and marketing
personnel. This reduction is reflective of our change in the business model
from the development of Intranets and the generation of advertising revenue
from pharmaceutical and medical device manufacturers who advertise on these
Intranets to our focus on clinical e-commerce. Included in sales and marketing
expenses are charges from Synetic of $575,000 for the year ended June 30, 1998
and $206,000 for the period from inception (December 24, 1996) through June 30,
1997. These charges represent an allocation of compensation costs for personnel
who devote a majority of their time to our company, and primarily relate to
business development and marketing support services. The increase in these
allocated expenses is primarily due to the longer fiscal period and to a lesser
extent, increased staffing to support our business.
General and administrative expenses were $3,887,000 for the year ended
June 30, 1998 and $1,379,000 for the period from inception (December 24, 1996)
through June 30, 1997, respectively. The increase in general and administrative
expenses of $2,508,000 resulted primarily from the longer fiscal period and
increased occupancy costs. Included in general and administrative expenses are
charges from Synetic of $261,000 for the year ended June 30, 1998 and $24,000
for the period from inception (December 24, 1996) through June 30, 1997. These
charges represent an allocation of compensation costs for personnel who devote
a majority of their time to our company, and primarily relate to administrative
and legal services. The increase in these allocated expenses is primarily due
to the longer fiscal period and, to a lesser extent, increased staffing to
support our business.
Purchased research and development for the period from inception
(December 24, 1996) through June 30, 1997 was $32,185,000. This relates to the
write-off of the portion of the purchase price allocated to acquired in-process
research and development for the Avicenna and Care Agents acquisitions.
Results of Operations -- Avicenna (predecessor business)
Period from January 1, 1996 through December 23, 1996 Compared to Year Ended
December 31, 1995
Research and development expenses were $1,161,000 for the period from
January 1, 1996 through December 23, 1996 and $86,000 for the year ended
December 31, 1995. The increase in total expenditures was primarily due to a
significant increase in the number of research and development personnel
resulting in increased compensation, benefits, recruitment and other personnel
related expenses.
Sales and marketing expenses were $1,297,000 for the period from January
1, 1996 through December 23, 1996 and $12,000 for the year ended December 31,
1995. The increase is due to the increase in staffing along with deploying
marketing programs, advertising and travel relating to the Intranet sales
business.
General and administrative expenses were $860,000 for the period from
January 1, 1996 through December 23, 1996 and $69,000 for the year ended
December 31, 1995. Most of the increase in expenditures
24
<PAGE>
was due to additional general and administrative personnel working in legal,
finance and administrative functions. Additional cost increases include
consulting, public relations, rent, and depreciation.
Acquired In-Process Research and Development -- CareInsite
In connection with the acquisitions of Avicenna and CareAgents, we
allocated a portion of each purchase price to acquired in-process research and
development. The amount allocated to acquired in-process research and
development for each of these acquisitions was determined based on an income
approach valuation methodology. For both Avicenna and CareAgents a nine year
forecast of revenues and costs attributable to the acquired technology was
prepared. The nine year projection period was consistent with the expected
useful lives of the technology under development. The resulting operating cash
flows were then reduced by working capital and capital expenditures and
discounted to present value based on a discount rate of 30% for Avicenna and
50% for CareAgents. These different discount rates were used because, at the
time of acquisition, Avicenna had commenced operations, had more than 30
employees and had received financing. In contrast, CareAgents, at the time of
acquisition, had not commenced operations, had no employees other than its
stockholders, and had not received any financing. These amounts have been
expensed on the respective acquisition dates as the in-process research and
development had not reached technological feasibility and had no alternative
future use. A description of the acquired in-process research and development
and the estimates made by us is set forth below.
Avicenna. Avicenna's business plan was to design and market Intranets to
provider organizations to provide communication and reference capabilities to
these organizations. Doctors in these organizations would communicate via e-
mail and forum groups with centralized medical reference information with the
objective of reducing costs in a managed care environment. The fundamental
technology plan was to develop a client/server based application to allow
hospital affiliated doctors to access a local Intranet that housed medical
reference information, in-house policies and procedures, and communication
among the various parties. This required development of electronic search,
medical reference material storage and communication capabilities such as
forums and e-mail. The revenue model had been, prior to acquisition, primarily
one based on pharmaceutical and medical device manufacturer's advertising fees
on these Intranets. Avicenna also envisioned creating a search capability that
would allow doctors to quickly access relevant reference information on a
variety of medical topics from databases that were licensed to Avicenna. These
databases would be customized in format by Avicenna.
As of the acquisition date, Avicenna was in the early stages of its
development and the systems under development had not yet reached technological
feasibility. There was a working public Intranet site and they had begun to
implement the search techniques. Their primary mechanism to allow users to
search their Intranet sites and access content provided by hospitals,
advertisers, and others was to develop a method of customizing that content via
a software utility known as "Framework." Framework was in the initial stage of
development with the substantive system design, coding, and testing work
remaining incomplete. Framework was the fundamental piece of code that would
enable users to be able to both search and reference the content contained on
an Avicenna Intranet and thereby realize their business model.
As of the December 24, 1996 acquisition date, Avicenna had incurred
approximately $1,263,000 in research and development costs to develop the
technology to its status described above. It was estimated that over $3,000,000
of costs remained to complete the projects described above in the following
calendar year and that additional significant costs remained in subsequent
years to further enhance and maintain the capabilities of the Avicenna system.
Subsequent to the date of acquisition, we have modified the acquired technology
from both Avicenna and CareAgents and incorporated them into a broader system,
the CareInsite system.
CareAgents. CareAgents' business plan was to design and market Internet
based clinical commerce applications that allowed the various healthcare
participants to exchange information and conduct basic medical transactions
with each other. Participants included patients, providers, and suppliers. The
fundamental
25
<PAGE>
technology plan was to create an Internet and standards based connection
between the participants and then provide specific transaction capabilities
using both internally and externally developed application software.
CareAgents' technology was in the very early stages of development with
basic user requirements, a business plan, preliminary system architecture with
process flow diagrams and prototyping efforts comprising the work completed to
date. In excess of $8,000,000 in costs remained over the next two years to
mature the technology to the point of technological feasibility and then
complete for first product deployment. No work had been completed on a detailed
engineering design or on building or testing any substantive code.
Liquidity and Capital Resources -- CareInsite
Our operations since Inception (December 24, 1996) have been funded
through capital contributions from Synetic. As of March 31, 1999, we had
$5,058,000 of cash and cash equivalents.
Cash used in operating activities was $12,447,000 for the nine months
ended March 31, 1999, $9,052,000 for the year ended June 30, 1998 and
$5,011,000 for the period from Inception (December 24, 1996) through June 30,
1997. The cash used during this period was primarily attributable to the losses
associated with the development of our business activities.
Cash used in investing activities was $9,243,000 for the nine months
ended March 31, 1999, $6,721,000 for the year ended June 30, 1998 and
$1,371,000 for the period from Inception (December 24, 1996) through June 30,
1997 and related primarily to capital expenditures.
Cash provided by financing activities was $26,433,000 for the nine months
ended March 31, 1999, $15,842,000 for the year ended June 30, 1998 and
$6,628,000 for the period from Inception (December 24, 1996) through June 30,
1997. Such amounts represent capital contributions made by Synetic.
In addition, pursuant to our strategic relationship with THINC, we have
committed to extend up to $2,000,000 and $1,500,000 in senior loans to THINC.
In connection with our strategic relationship with Cerner, Cerner has agreed to
fund $1,000,000 of our $2,000,000 loan to THINC. See "Transactions and
Relationships with Principal Stockholders."
In addition, Cerner has agreed to purchase directly from us 600,000
shares of our common stock in a separate private transaction concurrent with
this offering. We estimate the net proceeds from the sale of shares of common
stock to Cerner in such transaction will be approximately $ million. See
"Transactions and Relationships with Principal Stockholders -- Cerner."
We currently anticipate that the net proceeds from the offering and
proceeds from the sale of shares to Cerner in a concurrent private transaction,
together with our available cash resources, will be sufficient to meet our
presently anticipated working capital, capital expenditure and business
expansion requirements for approximately the next 18 months. There can be no
assurance we will not require additional capital prior to the expiration of an
18-month period. Even if such additional funds are not required, we may seek
additional equity or debt financing. We cannot assure you that such financing
will be available on acceptable terms, if at all, or that such financing will
not be dilutive to our stockholders.
Year 2000 -- CareInsite
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries for the year in the date code
field. These systems and software products will need to accept four digit year
entries to distinguish 21st century dates from 20th century dates. As a result,
computer systems and/or software used by many companies and governmental
agencies may need to be upgraded to comply with such Year 2000 requirements or
risk system failure or miscalculations causing disruptions of normal business
activities.
26
<PAGE>
State of Readiness. We have made a preliminary assessment of the Year
2000 readiness of our information technology systems, including the hardware
and software that enable us to develop and deliver our healthcare e-commerce
services as well as our non-information technology systems. Our assessment plan
consists of:
. quality assurance testing of our internally developed proprietary
software;
. contacting third-party vendors and licensors of material hardware,
software and services that are both directly and indirectly
related to developing our healthcare e-commerce network;
. contacting vendors of material non-IT systems;
. assessment of repair or replacement requirements;
. repair or replacement; and
. implementation.
We have been informed by our vendors of material hardware and software
components of our IT systems that the products used by us are currently Year
2000 compliant. We have also been informed by our non-IT system vendors that
the products used by us are currently Year 2000 compliant.
Costs. To date, we have not incurred any material expenditures in
connection with identifying or evaluating Year 2000 compliance issues. Most of
our expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent developing a Year 2000 compliant
healthcare e-commerce channel.
We are not currently aware of any Year 2000 compliance problems relating
to our information technology or non-information technology systems that we
believe would have a material adverse effect on our business, financial
condition and results of operations. There can be no assurance that we will not
discover Year 2000 compliance problems that will require substantial revisions
to our systems, products or services. In addition, there can be no assurance
that third-party software, hardware or services incorporated into our material
information technology and non-information technology systems will not need to
be revised or replaced, all of which could be time consuming and expensive. Any
failure to fix our information technology systems or to replace third-party
software, hardware or services on a timely basis could result in lost revenues,
increased operating costs, the loss of customers and other business
interruptions, any of which could have a material adverse effect on our
business, results of operations and financial condition.
In addition, there can be no assurance that physicians, payers,
suppliers, Internet access companies, third-party service providers, vendors,
business partners and others outside our control will be Year 2000 compliant.
The failure by such entities to be Year 2000 compliant could result in a
systemic failure beyond our control, such as a prolonged Internet or
communications failure, which could also prevent us from delivering our
services to customers, decrease the use of the Internet or prevent users from
accessing our service. Such a failure could have a material adverse effect on
our business, results of operations and financial condition. Also, a general
Year 2000 systemic failure could require healthcare companies to spend large
amounts of money to correct any such failures, reducing the amount of money
that might otherwise be available to be spent on services such as ours.
Contingency plan. We are continuing to assess and test our systems for
Year 2000 compliance. We have also developed contingency plans for system
failure, service disruption and data corruption issues due to Year 2000
problems. In the event that there is a system problem due to a Year 2000 date,
we will immediately attempt to diagnose and fix the problems. At the same time,
we will change (a) the system clock back to 1999 while separately logging all
transactions so affected and/or (b) the dates within transactions to 1999 while
separately logging all transactions so affected. In the event that a Year 2000
problem occurs at an external entity, that entity will be informed of the
problem and we will continue to review and repair the dates until the
27
<PAGE>
problem is fixed. We cannot assure you that we will be able to successfully
diagnose and/or fix any Year 2000 problems that occur or that the cost of doing
so will not be material.
As the Year 2000 issue has many elements and potential consequences, some
of which are not reasonably foreseeable, the ultimate impact of the Year 2000
on our operations could differ materially from our expectations.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board, or "FASB," issued
Statement of Financial Accounting Standards, or "SFAS," No. 131, "Disclosures
about Segments of an Enterprise and Related Information." We are required to
adopt SFAS No. 131 for the year ending June 30, 1999. SFAS No. 131 requires
disclosure of certain information regarding operating segments, products and
services, geographic areas of operation and major customers. Adoption of SFAS
No. 131 is expected to have no material impact on our financial condition or
results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." We are required to adopt SFAS No. 133 for
the year ending June 30, 2000. SFAS No. 133 establishes methods of accounting
for derivative financial instruments and hedging activities related to those
instruments as well as other hedging activities. Because we currently hold no
derivative financial instruments and do not currently engage in hedging
activities, adoption of SFAS No. 133 is expected to have no material impact on
our financial condition or results of operations.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position, or "SOP," 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires
that entities capitalize certain costs related to internal-use software once
certain criteria have been met. We are required to implement SOP 98-1 for the
year ending June 30, 2000. Adoption of SOP 98-1 is expected to have no material
impact on our financial condition or results of operations.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position, or "SOP," 98-5, "Reporting on the Costs of Start-
Up Activities." SOP 98-5 requires that entities expense start-up costs as
incurred. We are required to implement SOP 98-5 for the year ending June 30,
2000. Adoption of SOP 98-5 is expected to have no material impact on our
financial condition or results of operations.
28
<PAGE>
BUSINESS
We are developing and intend to provide an Internet-based healthcare
electronic commerce network for interactive use by physicians, payers,
suppliers and patients. We intend to market a comprehensive set of transaction,
messaging and content services to physicians, to payers such as managed care
organizations and pharmacy benefit managers, or PBMs, to suppliers such as
pharmacies and clinical laboratories, and to patients. Physicians will be able
to use a web browser to access relevant clinical, administrative and financial
information of payers and suppliers through our CareInsite system to make more
informed decisions at the point of care. We believe our integration of payer-
specific rules and healthcare guidelines with patient-specific information at
the point of care will improve the quality of patient care, lead to more
appropriate use of healthcare resources, gain compliance with benefit plan
guidelines and control healthcare costs.
We currently provide services to The Health Information Network
Connection LLC, referred to as THINC, an entity founded in 1996 by several
major managed care organizations in the New York metropolitan area to
facilitate the confidential exchange of healthcare information. Under our
agreement, we will manage THINC's operations and make a comprehensive suite of
healthcare e-commerce services available to the New York metropolitan area's
more than 40,000 physicians. We believe that our relationship with THINC in New
York will serve as a springboard for launching our services on a national
basis. As part of this relationship, we also acquired a 20% ownership interest
in THINC.
We have recently entered into a strategic relationship with Cerner
Corporation, a publicly traded corporation that is a leading supplier of
clinical and management information systems to more than 1,000 healthcare
organizations worldwide. Through this relationship, we have a perpetual,
royalty-free license to certain of Cerner's technology, consisting of the
clinical and administrative information technology contained in Cerner's Health
Network Architecture, including their Millennium Architecture, for use in our
CareInsite system. Cerner has agreed that CareInsite will be its exclusive
vehicle for providing a full suite of healthcare e-commerce services that
connect physicians' offices with managed care organizations, PBMs, clinical
laboratories, pharmacies and other providers. Cerner has also agreed to market
our services to its customers. In addition, Cerner has acquired a 19.9%
interest in our company.
Our parent company, Synetic, has entered into a definitive merger
agreement with Medical Manager Corporation that provides for a strategic
business combination between the two companies. Medical Manager is a leading
provider of comprehensive physician practice management systems. These systems
automate the office tasks for a physician base estimated at more than 120,000
in more than 24,000 medical practices nationwide. Medical Manager has a
distribution network of independent and company-owned offices with almost 2,000
sales and technical support personnel who provide service, training and support
to physician offices in major markets in the United States.
In connection with this business combination, Medical Manager and our
company have entered into an agreement under which we will be the exclusive
provider of certain network, web hosting and transaction services to Medical
Manager. Under this agreement, we intend to provide our healthcare e-commerce
services to Medical Manager's physician base estimated at more than 120,000 by
integrating those services into Medical Manager's physician practice management
systems. We intend to use Medical Manager's sales and support network as a
platform from which to distribute, install and support our transaction,
messaging and content services to Medical Manager physicians.
We believe our services have several advantages over the services offered
by our competitors, several of which have services that are currently in
operation. We believe that:
. our integration of payer-specific benefit rules and healthcare
guidelines with patient-specific information at the point of care
provides a unique ability to control the costs and improve the
quality of healthcare;
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<PAGE>
. our management's experience in clinical process automation,
healthcare transaction processing and benefit management enables
us to design and implement a healthcare e-commerce network that is
responsive to the needs of physicians, payers, suppliers and
patients; and
. our CareInsite system is being built with existing, well-proven
software and system interfaces, including the licensed Cerner
technology, that can be integrated with other healthcare
information systems in an efficient and scalable manner.
Industry Background
Healthcare expenditures in the United States totaled approximately $1.0
trillion in 1996, representing a 6.7% compound annual increase since 1990.
Increases in healthcare costs have been driven principally by technological
advances in the healthcare industry and by the aging of the population, as
older Americans utilize more healthcare resources on a per capita basis. This
increasing trend in aggregate healthcare costs is expected to continue.
In the past 15 years, the U.S. healthcare industry has undergone
significant changes. Among the most significant of these changes has been a
shift away from fee-for-service indemnity plans into health maintenance
organizations, or HMOs, and other managed healthcare benefit plans. These
payers have used a variety of managed care techniques to control administrative
costs including, but not limited to, lowering reimbursement rates, shifting
costs from payers to patients, restricting coverage for services, limiting
access to a select group of providers, negotiating discounts with healthcare
providers, case management functions, and shifting the economic risk for the
delivery of care to providers through alternative reimbursement models, such as
capitation and risk pools. While these techniques have been initially helpful
in controlling healthcare costs, we believe that these techniques have over
time become less effective in reducing costs. Managed healthcare organizations
today are experiencing rising healthcare costs and we believe their ability to
reduce patient care costs, which represent approximately 85% of annual
healthcare costs in the United States, is limited.
We believe that future healthcare cost management is increasingly
dependent upon compliance with benefit plan guidelines designed to promote the
appropriate use of healthcare resources and adherence to best clinical
practices to improve the quality of care and control patient care costs. We
believe payers are unlikely to gain compliance with these guidelines and
practices without an efficient channel of communications to their affiliated
physicians. Today, electronic communication among the physician, payer and
supplier is typically limited to administrative transactions. These
communications typically occur at specified times of day, usually several hours
after medical care has been given or treatment has been prescribed. We believe
that compliance with benefit guidelines can be better achieved through
Internet-based healthcare e-commerce systems that enable real time
communication at the point of care of clinical information as well as basic
administrative and financial information.
The dramatic growth of the Internet as an important new medium to collect
and distribute information, communicate, interact and engage in commerce has
emerged as a way to overcome the historical technical barriers for connecting
the participants in the fragmented healthcare industry. These technical
barriers are diminishing as:
. universal, low-cost Internet access is replacing private networks;
. common navigation via browser technology is replacing proprietary
desktop client software; and
. the Internet's open architecture is providing a solution for
integrating existing computer systems.
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Factors Influencing Healthcare's Core Constituents
We believe the healthcare industry's core constituents -- physician,
payer, supplier and patient -- will benefit from timely access to patient-
specific information and payer content, such as benefit rules and care
guidelines, in order to reduce the complexity of administration, increase
compliance with benefit plan guidelines, secure appropriate use of healthcare
resources and improve the quality of patient care.
Physicians. Physicians are confronted with a proliferation of health
plans, each of which has complex clinical, administrative and financial rules
and guidelines relating to matters such as eligibility for prescriptions, lab
tests, referrals and follow-up visits, scope of coverage and co-payments. These
complex rules and guidelines require administrative personnel to spend
significant time navigating the cumbersome administrative procedures of a large
number of health plans often after the medical care has been given or
prescriptions or referrals have been written. This complexity has created
demand for real-time information exchange across all patients and all payers to
streamline cumbersome and time-consuming clinical and administrative processes.
Payers. Payers, such as health maintenance organizations and pharmacy
benefit managers, are finding less incremental value in the historical levers
of managed care. In order to stem the unabated growth in healthcare costs,
managed care plans must do more than automate the administrative and financial
processes that govern the provision of services and the payment of claims.
While administrative costs account for approximately 15% of annual healthcare
expenditures, it is the cost of care itself, approximately 85% of annual
healthcare expenditures, which primarily drives the growth in healthcare
expenditures. We believe that compliance with benefit plan guidelines that
promote more efficient use of healthcare resources and adherence to best
practices will result in cost reductions and improvements in the quality of
care. Payers are seeking an efficient channel to communicate their benefit plan
rules and care guidelines to physicians at the point of care in order to
realize savings.
Suppliers. Pharmacies, clinical laboratories and other suppliers are
being forced to become increasingly efficient in managing their business as
managed care organizations have negotiated significant reductions in price and
demanded measurable improvements in quality. Pharmacies continue to incur
substantial inefficiencies in the process of managing orders with physicians
and patients. We believe that as many as ten percent of the nation's
approximately 2.8 billion annual prescriptions require telephone intervention
between the pharmacist and patient or physician. We also believe that fewer
than 20% of laboratory orders and/or results in the ambulatory care environment
are submitted or transmitted through electronic systems. Physicians have been
slow to adopt these systems because they are proprietary in nature and are
usually limited to results reporting. Consequently, clinical laboratories incur
unnecessary administrative costs associated with processing and reporting
orders and also incur significant losses related to tests for which
reimbursement is not authorized.
Patients. As the payer exerts increasing influence over plan design,
service coverage, and provider access, patients are demanding ever more
objective measures of quality and cost. This is evidenced by the unprecedented
demand for healthcare information on the Internet, confirming both the absence
of information from traditional sources, and desire for additional sources of
objective, credible and trustworthy information.
Strategy
Our objective is to provide an Internet-based healthcare e-commerce
network for interactive use by physicians, payers, suppliers and patients in
order to control healthcare costs and improve patient care. Our relationships
with THINC and Cerner represent the initial execution of our strategy and
enhance our ability to continue and expand upon this strategy. Our strategy
includes the following elements.
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Provide transaction, messaging and content services responsive to the needs of
physicians
We intend to provide physicians with transaction, messaging and content
services. These services are intended to complement the clinical work flows and
existing computer systems which characterize the physician office environment.
Our prescription, laboratory and managed care communication services respond to
the physician's need to provide patient care consistent with payer guidelines.
Specialized messaging services provide the office staff with alert and advisory
applications which facilitate patient treatment compliance, prescription
renewals and laboratory ordering results and automate time consuming paper and
telephonic processes. Content services, in the form of indexed and searchable
directories and databases, provide physicians with convenient access to payer-
specific information and general medical reference material. Together, these
services provide much needed context for informed decision making.
Our services are designed to work for all payers and suppliers, since
physician adoption requires services which work for virtually all patients. Our
strategy, by definition, is to remain "content-neutral." In other words, we do
not create our own content for physicians -- this is the role of our payers and
suppliers. Rather, we contract with payers and suppliers to transmit their
content in the form of clinical, administrative and financial guidelines over
our network and display these rules, in the form of alerts, advisories and
annotations to the physician at the point of care.
As part of our relationship with THINC, we intend to deploy on behalf of
THINC and offer to the New York Metropolitan area's 40,000 physicians, a
comprehensive suite of transaction, messaging and content services. As a result
of this relationship, physicians will have the ability to conduct nine
different prescription, laboratory and managed care transaction services that
we believe will simplify and automate their interaction with area health plans.
Contract with key payers and suppliers to make patient-specific rules available
to physicians
Our marketing strategy is to contract with the managed care
organizations, pharmacy benefit managers, pharmacies and clinical laboratories
who benefit from the automation of specific clinical, administrative or
financial processes. Payers define the rules that govern the course of care
available to patients, and contract with physicians and suppliers to meet
specific cost and quality standards. Suppliers respond to physician orders,
dispensing prescriptions and conducting laboratory tests. By integrating
patient-specific information with benefit plan and supplier specific rules
through our CareInsite system at the point of care, we believe these
institutions will realize administrative and medical resource savings, improved
patient care and more appropriate resource utilization.
We have contracted with each of Empire Blue Cross and Blue Shield, Group
Health Incorporated and HIP, the payer participants in THINC, to provide our
prescription and laboratory communication services. We have also contracted
with National Prescription Administrators (NPA), a pharmacy benefit manager, to
provide our prescription communication services. We are engaged in discussions
with other leading payers and suppliers in the New York metropolitan area with
respect to these services. See "Transactions and Relationships with Principal
Stockholders -- Certain Agreements -- THINC."
Build and deploy the CareInsite system
Our technology strategy is focused upon building and deploying the
CareInsite system, which permits the integration of patient-specific
information with payer- and other supplier-specific guidelines. The CareInsite
system is intended to:
. host or connect to multiple payer- or supplier-specific
guidelines, such as procedure level eligibility, benefit plan
coverage, formularies and order sets;
. host or connect to patient-specific profiles, such as lab results
or medication histories;
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. analyze an incoming request or order versus payer- or supplier-
specific guidelines;
. transmit payer- or supplier-specific annotations, alerts and
advisories when the orders or requests are at variance with
guidelines; and
. transmit payer- or supplier-specific content and messages to
authorized healthcare participants.
We believe our perpetual, royalty-free license to the Cerner technology
will allow us to accelerate the building and deployment of our CareInsite
system. This technology is central to the CareInsite system's ability to
register and identify patients, house patient-specific information, analyze
requests, and communicate payer rules in the form of alerts, advisories and
annotation messages.
Maximize distribution to physicians with high transaction volumes
Our distribution strategy is to target the high-volume physicians who
account for the majority of transactions. We work closely with payers and
suppliers to identify these physicians. In addition, we work closely with
providers of desktop software to physicians. Our strategy is to complement,
rather than compete with, vendors who market and provide software and network
services to physicians. We intend to contract with these vendors, such as
Cerner and THINC, to gain distribution of our services. We intend also to
provide physicians with direct access to our networks, as well as indirect
access via links from other web portals. Our primary sales vehicle is our
direct sales force, which targets groups of physicians.
As part of the THINC agreement, we are responsible for maximizing
adoption of these services by the New York metropolitan area's 40,000
physicians. Each of THINC's founding payers is responsible for providing us
with a list of target physicians, and taking appropriate steps to ensure that
physicians understand and use the services. To maximize distribution, we have
entered into a marketing agreement with Greater New York Hospital Association
to market these services to its hospital members. We have entered into a
distribution agreement with Cerner for integrating our services into Cerner's
physician desktop software, and are pursuing discussions with other leading
providers of physician desktop software.
Pursue strategic relationships and acquisitions
We intend to continue to pursue opportunistic strategic relationships,
including customer/vendor agreements, joint ventures and acquisitions. We
believe that making strategic acquisitions and developing strategic industry
relationships will enhance our ability to penetrate additional markets through
new distribution channels and develop and provide additional services.
The THINC and Cerner arrangements evidence our intent to pursue strategic
relationships, joint ventures, and partnerships to accelerate growth of our
network and build substantial value for physicians, payers, and suppliers.
Company Services
We intend to utilize the Internet to provide a broad array of browser
initiated healthcare e-commerce solutions which facilitate the confidential,
on-line exchange of healthcare information for all constituents in the
healthcare industry. Our healthcare e-commerce services include the
transaction, content and messaging services described below.
Transaction Services. Our transaction services include prescription,
laboratory and managed care communication services. Our prescription and
laboratory communication services are focused upon assisting physicians to more
efficiently support diagnoses and plan, prescribe and follow treatment,
consistent with payer guidelines. Our managed care communication services will
be focused upon automating the telephonic and
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paper processes physicians and payers conduct in order to verify coverage and
reimbursement, process medical claims, and manage patient access to procedures
and providers. We believe that significant market opportunities exist for these
services given the size of such markets and the potential for improved
efficiencies.
Prescription Communication Services. Our prescription communication
services, called RxInsite, are targeted to physicians, pharmacy benefit
managers, pharmacies and payers. While communication of payer and pharmacy
benefit manager rules to the pharmacy at the point of dispensing through
existing electronic data interchange networks has yielded substantial
administrative savings, payers and pharmacy benefit managers need an efficient
means to communicate their rules to physicians at the point of care in order to
further control drug expenditures and improve the quality of care. We believe
that payers and pharmacy benefit managers may realize significant savings
through greater prescribing of generic drugs, increased use of preferred
formulary drugs, and greater compliance with best clinical practices and
treatment guidelines. Since no single payer or pharmacy benefit manager
typically represents a majority of a physician's patients, these organizations
need a common network to communicate with physicians.
Our RxInsite services will provide physicians the ability to write
prescriptions in the context of patient medication histories and payer clinical
rules. As a result, they can improve patient care, reduce potentially harmful
drug interactions, lessen the number of telephone calls from payers and
pharmacies, and improve patient satisfaction. Payers and pharmacy benefit
managers who use our services may gain the ability to communicate their
patients' dispensed medication histories, drug utilization review results,
formulary and treatment guidelines to the physician through the CareInsite
system. As a result they may realize the savings and improvement in patient
care that accompany compliance with their guidelines. Pharmacies may reduce
administrative costs as prescriptions are clarified and corrected before they
are submitted to the pharmacy for dispensing.
Laboratory Communication Services. Our laboratory communications
services are targeted to physicians, payers and clinical laboratories. These
services will facilitate the electronic transmission of laboratory orders and
results between the physician and the clinical laboratory. This will enable the
physician to order diagnostic tests online from the clinical laboratory within
the context of a specific patient's lab coverage. In a managed care
environment, payers are seeking to ensure quality of patient care and to
minimize overall healthcare costs by eliminating unnecessary or redundant tests
and establishing testing protocols. Similarly, clinical laboratories, managing
deep discount and capitation contracts, are seeking to provide care as
efficiently and appropriately as possible. These services will provide payers
the ability to communicate payer-specific information and treatment guidelines
which should lead to significant reductions in test costs. Clinical
laboratories also are expected to gain the ability to obtain significant
savings through process automation of the orders and results process. Moreover,
they should be able to more effectively manage payer rules, minimize costs
under capitation contracts and reduce the incidence of overdue payments and bad
debt.
Managed Care Communication Services. Our managed care communication
services are comprised of a comprehensive set of administrative and financial
network services as described below, and are designed to gain authorization
from payers for procedures, visits and referrals to network physicians and
providers and to facilitate reimbursements.
Claims services. Healthcare claims are the most commonly communicated
transactions between physicians and payers today. Our claims services are
designed to allow physicians to submit claims to payers for payment, inquire as
to the status of claims previously submitted and receive electronic remittance
advice which provides payment information as well as an explanation of the
settlement of the related claim. Our claims services will reduce administrative
paperwork, resulting in savings for payers, and expedite the reimbursement
process, which are intended to result in lower average number of outstanding
accounts receivable days for physicians.
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Eligibility services. Verification as to whether services rendered to a
patient are eligible for reimbursement is the most basic of e-commerce
applications, but one which is largely provided today via telephone and fax.
Given the proliferation of managed care organizations and the increasing
complexity of their rules and guidelines, we believe that there will be an
increasing demand for timely and accurate electronic eligibility determination.
Physicians would benefit by being able to verify the terms of reimbursement
prior to providing services to the patient. Payers would benefit by being able
to eliminate the cost of processing claims and paying for claims from
ineligible patients.
Referral and Pre-Certification Authorization Services. Referral
authorization transactions facilitate physician-to-physician referrals by
providing the physician with the payer's referral rules at the point of care.
Pre-certification authorization transactions involve the determination as to
whether a patient can be pre-certified for hospitalization or in-hospital
procedures. These services will reduce the incidence of referral or pre-
certification errors, which thereby reduce unauthorized treatment.
Content Services. Our content services will provide physicians with
online access to both available medical reference material, and the private
content unique to payers. We continue to license publicly available content
resources, including medical databases and other general reference material. We
intend to contract with payers to re-purpose for publication via the CareInsite
system through the Internet their private-content, benefit plan information,
provider directories, formularies, policies and procedures, treatment
guidelines and other patient education and wellness information, and make it
available in an indexed and easily searchable format. We believe our services
will be differentiated from our competitors in our unique ability to integrate
content into our messaging and transaction applications in order to provide
physicians with the requisite context for informed decision making.
Messaging Services. Our messaging services will provide physicians with
online access to patient and payer specific inquiries, alerts and advisories as
well as e-mail and broadcast message applications. Messaging applications
facilitate communication between physician, payer, supplier and patient. In
particular, messaging applications are intended to simplify time consuming
processes for the physicians' staff. Prescription messaging applications
include prescription renewal and interchange programs which automate telephonic
processes between patient, physician and pharmacy. Laboratory messaging
programs will provide the ability to not only view results, but also order
subsequent tests as suggested by payer rules and treatment guidelines. We
believe our services will be differentiated from our competitors in our unique
ability to integrate messaging into our transaction applications.
Sales and Marketing
Our sales and marketing efforts will be focused upon four target
audiences:
. payers, including pharmacy benefits managers,
. suppliers, including clinical laboratories,
. physicians, including physician practice management groups, and
. business development partners, including physician software and
network service vendors.
Our key objectives are to maximize the number of physicians registered to use
the service, maximize the number of patient lives covered by participating
payers and pharmacy benefit managers, and maximize the number of participating
suppliers. We will market our services through multiple channels, including
building on our model in the greater New York area, working closely with payer
and supplier customers to maximize physician enrollment, working with physician
office management information systems and hospital information systems vendors
and electronic data interchange networks and through strategic relationships.
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Once contracts are in place, our customer service strategies are
essential to our ability to maximize physician use of our services and minimize
payer and supplier attrition. We expect to provide toll free telephone support
to physician and physician office staff members seven days a week, 24 hours per
day. We intend to provide online resources and help functions which should
facilitate solutions to most frequently asked questions. In addition to our
customer service center, we intend to provide account management services to
our payer, supplier and distribution partners. These personnel provide
implementation support to customers, and provide an ongoing channel of
communication between our company and our customers to ensure that our services
consistently meet customer needs.
Physicians. We will market our services to physicians in several ways.
Employing the target data from payer and supplier customers, we intend to
employ a direct sales force to contract with large groups of physicians. In
addition, we intend to adopt a strategy of complementing, rather than competing
with traditional providers of desktop software and network services to
physicians, by pursuing marketing relationships with those vendors.
Payers. We will contract with payers to maximize the number of patient
lives accessible by participating physicians. We also intend to work closely
with payers to maximize physician enrollment. Together, we will seek to
identify groups of high volume physicians that represent the majority of
potential transactions. In addition, we will work closely with payers to
maximize physician adoption of these services.
Suppliers. We will contract with clinical laboratories which represent
the bulk of transaction volume on a local and national basis. We also intend to
work closely with payer customers to identify and contract with the preferred
clinical laboratories that comprise their managed care networks. In turn, we
will work with these suppliers to maximize physician enrollment by identifying
those physicians which represent the majority of their prescription and
laboratory transactions.
Relationship with THINC. We have entered into definitive agreements for a
broad strategic alliance in January 1999 with THINC, and its founding members,
Greater New York Hospital Association, Empire Blue Cross and Blue Shield, Group
Health Incorporated Group Health Incorporated, and HIP Health Plans. Under this
arrangement, among other things, we will manage the operations of THINC,
including all aspects of marketing and sales, implementation, customer service
and technical operations. In addition, THINC will provide managed care
transaction services on behalf of Empire, Group Health Incorporated and HIP,
including online medical claims submission, status, remittance advice,
eligibility, referral and pre-certification authorizations. We have also
licensed to THINC our content and messaging services for use over the THINC
network, and have entered into agreements with each of Empire, Group Health
Incorporated and HIP to provide online prescription and laboratory
communication services. See "Transactions and Relationships with Principal
Stockholders -- Certain Agreements -- THINC."
As part of our management services agreement with THINC, we are committed
to marketing these services to all other payers and suppliers in the New York
metropolitan area.
Technology Platform
Our system is comprised of a network of computers, related equipment and
application software that uses the Internet to link the key participants in the
healthcare industry. We expect that the CareInsite system will facilitate a
broad range of healthcare transactions, such as enabling a physician to order
prescriptions and lab tests and to verify a particular patient's eligibility
for treatment under his or her health plan, and will facilitate medical claims
processing, compiling medical data and informing physicians of particular
patient histories.
The CareInsite system is a comprehensive online transaction processing
environment focused on the key physician oriented aspects of healthcare e-
commerce. The CareInsite system is being designed to request,
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receive, rationalize, and present patients' clinical records, drug and medical
reference content, treatment guidelines, and financial status and payer rules
related to treatment preferences to the physician at the point of care.
Underlying these processes are the capabilities to acquire, validate, and
maintain patient- and plan-specific directories, house, and execute payer- and
provider-specific rules, as well as to analyze and report results.
The magnitude and complexity of the healthcare data model and rules
engines required to establish precise, relevant communication among healthcare
payers, providers, and eventually consumers at various points of care exceeds
the development capability of start-up Internet-focused enterprises. We
obtained a perpetual, royalty-free license to the Cerner technology, which
provides the foundation for our transaction processing environment and which we
believe will enable us to accelerate the roll out of our services. We will also
continue to leverage commercially available software, make acquisitions, create
joint ventures with strategic partners and pursue internal software
development.
Our technological innovation is the integration of the licensed Cerner
technology with the capability to deliver patient's health benefit rules at the
point of care. We leverage Cerner's proven person-focused data model, its
Master Patient Index supported by industry-leading patient matching procedures
and a portfolio of Web-enabled clinical applications. These applications are
currently accessed by more than 15,000 physicians who use them to support
clinical workflow in the hospital and integrated delivery network environment.
We build upon the Cerner Health Network Architecture to create the CareInsite
system which provides the ability to communicate our customers' benefit plan
rules, such as prior authorization, treatment guidelines, formularies and plan
specific order sets within physician's workflow at the point of care.
The CareInsite system incorporates industry leading capabilities with
respect to the following attributes:
Compatibility. Our technology solution is being designed to work with
virtually any physician's desktop system. The CareInsite system is designed to
work from within either Microsoft's or Netscape's browsers. We work with
vendors to integrate our transactions into physicians' workflow. We believe
that many of our competitors will have difficulty interfacing with existing
systems of multiple payers. The industry-wide challenge of building interfaces
to integrate with providers' and payers' existing systems is significantly
simplified because of Cerner's Interface Services, which include an application
that supports the interfacing of computer applications and its library of
foreign system interfaces that have been built, tested and are maintained to
interact with over 1,000 healthcare provider and payer-based systems. Our
system employs the licensed Cerner technology to provide access to information
from servers it does not control or own by implementing open interface
protocols and providing tools that simplify interface creation and data
integration. Moreover, our platform exploits Cerner's common data/process
model, which uses new standards to seamlessly integrate functions into the
workflow of client applications.
Security. A security database defines the relationship among all elements
in the system and maintains the required information to support all functions,
including login, availability of data, user-privileges, user activity and
inactivity monitoring, access control, transaction routing, billing, and error
messages. The security database is being designed to address unauthorized
disclosure of information, unauthorized modification of information, loss of
data integrity, and denial of service. The CareInsite system employs a variety
of techniques in order to provide a comprehensive and secure system, including
128-bit data encryption technology, firewall technology among all subnetworks
throughout the system, and systems to immediately identify break-in attempts
and automate lock-out if breaches are suspected. In addition, our system builds
upon the proven patient data security services of the Cerner systems.
Scalability. Scalability, the ability of a networked computer system to
support an increasing number of system users without adversely affecting system
performance, is inherent in the design and selection of software components for
the CareInsite system. CareInsite's applications are designed to be used by
thousands of physicians in a particular region of the country simultaneously.
CareInsite's applications and data center are
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designed to be rapidly scaled to support all of CareInsite's users with rapid
response times. The key software components of the CareInsite system have been
tested and benchmarked to verify this scalability.
Rapid Application Development. Our development of a single architecture,
common data model, use of industry standards wherever available, and object-
oriented approach to development is designed to maximize the speed with which
thoroughly tested, complex healthcare applications can be brought to market. We
use a method of software development called "time-boxed incremental delivery
life cycle model" for our software development, with certification and quality
assurance processes for each delivery into our service. Under this method, we
provide new releases of our software at regular intervals.
High Availability. We intend to maintain a highly reliable systems
architecture operating in our data center. The reliability is achieved by
duplication of key components, including networking devices, networking and
telecommunications connections and storage devices. In addition, high
availability of these operations will also be assured through the use of:
. uninterrupted power supply equipment;
. building-independent cooling and environmental systems;
. automatic fail-over of critical network services; and
. 24 hour a day monitoring of network connectivity, traffic,
hardware and software status.
Our data center will be in operation seven days a week, 24 hours a day.
Disaster Recovery. While we believe our facilities and operations will
include redundancy, back-up and security to ensure minimal exposure to systems
failure or unauthorized access, a comprehensive and prudent disaster recovery
plan will also be put in place. Incremental backups of both software and
databases will be performed on a daily basis and a full system backup will be
performed monthly. Backup tapes will be stored at an offsite location along
with copies of schedules/production control procedures, procedures for recovery
using an off-site data center, all off-site documentation, run books, call
lists, critical forms and supplies. We also intend to maintain power backup
throughout the enterprise should a power outage occur within the data center.
Competition
The market for healthcare e-commerce is in its infancy and is undergoing
rapid technological change. Competition will potentially come from several
areas, including traditional healthcare software vendors, electronic data
interchange network providers, emerging e-commerce companies or others.
Traditional healthcare software vendors typically provide some form of
physician office practice management system. These include companies like Medic
and IDX. These organizations primarily focus on the administrative functions in
the healthcare setting. Electronic data interchange network providers and
claims clearinghouses like Envoy, which was recently acquired by Quintiles
Transnational, and NDC provide connectivity to edit and transmit data on
medical and pharmacy claims. These companies are beginning to offer services
which may be competitive with our clinical e-commerce services. Companies like
Healtheon and other emerging e-commerce companies offer a range of services
which are competitive to ours. Any organizations that create stand-alone
healthcare software products may migrate into the healthcare e-commerce
business. Due to a high degree of system and application interconnectivity, we
believe that we will share common customers with many of these organizations.
We also believe that in most instances, our services are incremental and
complementary applications to the existing services offered by these companies.
Some of our competitors have services that are currently in operation.
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Government Regulation
Participants in the healthcare industry are subject to extensive and
frequently changing regulation at the federal, state and local levels. The
Internet and its associated technologies are also subject to government
regulation. Many existing laws and regulations, when enacted, did not
anticipate the methods of healthcare e-commerce we are developing. We believe,
however, that these laws and regulations may nonetheless be applied to our
healthcare e-commerce business.
Current laws and regulations which may affect the healthcare e-commerce
industry relate to the following:
. confidential patient medical record information,
. the electronic transmission of information from physicians'
offices to pharmacies, laboratories and other healthcare industry
participants,
. the use of software applications in the diagnosis, cure,
treatment, mitigation or prevention of disease,
. health maintenance organizations, insurers, healthcare service
providers and/or employee health benefit plans, and
. the relationships between or among healthcare providers.
We expect to conduct our healthcare e-commerce business in substantial
compliance with all material federal, state and local laws and regulations
governing our operations. However, the impact of regulatory developments in the
healthcare industry is complex and difficult to predict. We cannot assure you
that we will not be materially adversely affected by existing or new regulatory
requirements or interpretations. These requirements or interpretations could
also limit the effectiveness of the use of the Internet for the methods of
healthcare e-commerce we are developing or even prohibit the sale of a subject
product or service.
Healthcare service providers, payers, and plans are also subject to a
wide variety of laws and regulations that could affect the nature and scope of
their relationships with us. Laws regulating health insurance, health
maintenance organizations and similar organizations, as well as employee
benefit plans, cover a broad array of subjects, including confidentiality,
financial relationships with vendors, mandated benefits, grievance and appeal
procedures, and others. State and federal laws have also implemented so-called
"fraud and abuse" rules that specifically restrict or prohibit certain types of
financial relationships between us or our customers and healthcare service
providers, including physicians and pharmacies. Laws governing healthcare
providers, payers and plans are often not uniform between states, and could
require us to undertake the expense and difficulty of tailoring our business
procedures, information systems, or financial relationships in order for our
customers to be in compliance with applicable laws and regulations. Compliance
with such laws could also interfere with the scope of our services, or make
them less cost-effective for our customers.
Because of the Internet's popularity and increasing use, new laws and
regulations with respect to the Internet are becoming more prevalent. Such laws
and regulations have covered, or may cover in the future, issues such as:
. security, privacy and encryption,
. pricing,
. content,
. copyrights and other intellectual property,
. contracting and selling over the Internet,
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. distribution, and
. characteristics and quality of services.
Moreover, the applicability to the Internet of existing laws in various
jurisdictions governing issues such as property ownership, sales and other
taxes, libel and personal privacy is uncertain and may take years to resolve.
Demand for our applications and services may be affected by additional
regulation of the Internet. For example, until recently current Health Care
Financing Administration guidelines prohibited transmission of Medicare
eligibility information over the Internet. Any new legislation or regulation
regarding the Internet, or the application of existing laws and regulations to
the Internet, could adversely affect our business. Additionally, while we do
not currently operate outside of the United States, the international
regulatory environment relating to the Internet market could have an adverse
effect on our business, especially if we should expand internationally.
The growth of the Internet, coupled with publicity regarding Internet
fraud, may also lead to the enactment of more stringent consumer protection
laws. These laws may impose additional burdens on our business. The enactment
of any additional laws or regulations in this area may impede the growth of the
Internet, which could decrease our potential revenues or otherwise cause our
business to suffer.
We are subject to extensive regulation relating to the confidentiality
and release of patient records. Additional legislation governing the
distribution of medical records has been proposed at both the state and federal
level, and new federal laws or regulations are likely to be enacted within the
next six to nine months, pursuant to the Health Insurance Portability and
Accountability Act of 1996, which requires the Secretary of Health and Human
Services to promulgate rules governing the use and disclosure of individually
identifiable healthcare information no later than September, 1999, in the event
that Congress does not enact legislation on the subject. It may be expensive to
implement security or other measures designed to comply with any new
legislation. Moreover, regulations governing use and disclosure of healthcare
information may restrict our ability to deliver patient records under certain
circumstances or for certain purposes, or in a particular format, such as
electronically.
Other legislation currently being considered at the federal level could
affect our business. For example, the Health Insurance Portability and
Accountability Act of 1996 also mandates the use of standard transactions,
standard identifiers, security and other provisions by the year 2000, for
healthcare information that is electronically transmitted, processed, or
stored. We are designing our services to comply with these proposed
regulations; however, these regulations are subject to significant modification
prior to becoming final, which could cause us to use additional resources and
lead to delays in order to revise our services. In addition, our ability to
electronically transmit information in carrying out business activities depends
on other healthcare providers and payers complying with these regulations.
Employees
As of March 15, 1999, we had a total of 109 employees of whom there were
62 in technical development and engineering, 19 in sales and marketing, 7 in
customer service and 21 in finance and administration. Currently 28 of our
employees are involved full-time in providing services to THINC. None of our
employees are represented by labor unions and we have never experienced a work
stoppage. We believe our relationship with our employees to be good. Our
ability to achieve our financial and operational objectives depends on our
ability to continue to attract, integrate, retain and motivate highly qualified
technical and customer support personnel. A competitive environment exists for
qualified personnel in the New Jersey and Boston, Massachusetts area.
40
<PAGE>
Facilities
Our principal executive office is located in Elmwood Park, New Jersey, in
approximately 10,000 square feet of leased office space under a lease agreement
that expires on December 31, 2002. We also maintain approximately 46,000 square
feet of leased office space in Cambridge, Massachusetts under a lease that
expires in February 28, 2002. We believe that our facilities are adequate for
our current operations and that additional leased space can be obtained if
needed.
Legal Proceedings
In the normal course of business, we may become involved in various
claims and legal proceedings. In addition, we were named as a defendant in a
complaint filed by Merck & Co., Inc. and Merck-Medco Managed Care, L.L.C. in
February 1999 as described below.
Litigation by Merck & Co., Inc. and Merck-Medco Managed Care, L.L.C. against
our company
On February 18, 1999, Merck & Co., Inc. and Merck-Medco Managed Care,
L.L.C. filed a complaint in the Superior Court of New Jersey against our
company, Synetic, Martin J. Wygod, Chairman of our company and Synetic, and
three officers and/or directors of our company and Synetic, Paul C. Suthern,
Roger C. Holstein and Charles A. Mele. The plaintiffs assert that our company,
Synetic and the individual defendants are in violation of certain non-
competition, non-solicitation and other agreements with Merck and Merck-Medco,
and seek to enjoin us and them from conducting our healthcare e-commerce
business and from soliciting Merck-Medco's customers. The Synetic and Wygod
agreements provide an expiration date of May 24, 1999. The other individuals'
agreements provide for expiration in December 1999, in the case of Mr. Suthern,
March 2000, in the case of Mr. Mele, and September 2002, in the case of Mr.
Holstein.
A hearing was held on March 22, 1999 on an application for a preliminary
injunction filed by Merck and Merck-Medco. On April 15, 1999, the Superior
Court denied this application. We believe that Merck's and Merck-Medco's
positions in relation to us and the individual defendants are without merit and
we intend to vigorously defend the litigation. However, the outcome of complex
litigation is uncertain and cannot be predicted at this time. Any unanticipated
adverse result could have a material adverse effect on our company's financial
condition and results of operations.
In November 1993, Merck & Co., Inc. acquired 100% of the equity of Medco
Containment Services, Inc., the predecessor to Merck-Medco Managed Care,
L.L.C., for approximately $6.6 billion in a merger transaction. Synetic was a
publicly traded subsidiary of Medco until May 1994, when Medco sold its entire
interest in Synetic to Synetic and SN Investors, L.P., a limited partnership.
The general partner of SN Investors, L.P. is SYNC, Inc., whose sole stockholder
is Mr. Wygod. Prior to May 1994, Mr. Wygod was Chairman of Medco. The other
individual defendants in this litigation are also former officers and/or
directors of Medco.
41
<PAGE>
MANAGEMENT
Directors and Executive Officers
Set forth below is information concerning the current directors and
executive officers of CareInsite. The ages listed below are as of March 18,
1999.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Paul C. Suthern.... 47 President and Chief Executive Officer; Director
Richard S. Cohan... 46 Executive Vice President -- Operations
Roger C. Holstein.. 46 Executive Vice President -- Sales & Marketing; Director
David M. 47 Executive Vice President -- Chief Scientist; Director
Margulies.........
David C. Amburgey.. 35 Vice President -- General Counsel and Secretary
Paul M. Bernard.... 42 Vice President -- Chief Financial Officer
Martin J. Wygod.... 59 Chairman of the Board; Director
James R. Love...... 43 Director
Charles A. Mele.... 42 Director
</TABLE>
Paul C. Suthern became Chief Executive Officer and President and a
Director of our company in March 1999. Mr. Suthern has been President and Chief
Executive Officer of Synetic since March 1998 and was an executive officer of
Synetic from February 1993 until July 1996, Vice Chairman of Synetic from July
1996 to March 1998 and also Chief Executive Officer from October 1993 until
January 1995. Mr. Suthern was also President and Chief Operating Officer of
Medco Containment Services, Inc. from November 1992 through December 1994 and
Assistant to Medco's Chairman from December 1991 to November 1992. Prior
thereto, he was Executive Vice President -- Operations for more than five
years.
Richard S. Cohan became Executive Vice President -- Operations of our
company in March 1999. Mr. Cohan joined Synetic in May 1998 as Senior Vice
President. Prior to joining Synetic, he was Executive Vice President, Health
Network Services of National Data Corporation where he led the practice
management systems and transactional services groups for pharmacy, physician
and dental markets for more than five years.
Roger C. Holstein became Executive Vice President -- Sales & Marketing
and a Director of our company in March 1999. Mr. Holstein has been Executive
Vice President -- Marketing and Sales of Synetic since 1997. He was a Special
Consultant to Medco from 1996 to 1998. Prior to such time, Mr. Holstein acted
as Senior Executive Vice President -- Chief Marketing Officer of Medco from
1994 to 1995 and Senior Executive Vice President--Marketing and Sales of Medco
from 1991 to 1994.
Dr. David M. Margulies became Executive Vice President -- Chief Scientist
and a Director of our company in March 1999. Dr. Margulies has been Executive
Vice President -- Chief Scientist of Synetic since January 1997. He was founder
and President of CareAgents. From 1990 to mid-1996, Dr. Margulies was Executive
Vice President and Chief Scientist of the Cerner Corporation, a leading
supplier of enterprise-level clinical applications. Prior to such time, he was
Vice President and Chief Information Officer at Boston Children's Hospital and
on the medical faculties of the Harvard Medical School and Columbia College of
Physicians and Surgeons.
David C. Amburgey became Vice President -- General Counsel and Secretary
of our company in March 1999. Mr. Amburgey has been Vice President -- Legal and
Assistant General Counsel of Synetic since March 1999 and Assistant General
Counsel and Secretary of Synetic since April 1997. Prior to joining Synetic,
Mr. Amburgey was an attorney with the law firm of Shearman & Sterling since
1993.
Paul M. Bernard became Vice President -- Chief Financial Officer of our
company in March 1999. Mr. Bernard joined Synetic as Vice President -- Finance
and Chief Financial Officer of Avicenna Systems Inc.
42
<PAGE>
in June 1997. Mr. Bernard was Chief Financial Officer of Brainstorm
Technologies from March 1997 to June 1997, and prior to that Corporate
Controller of Micro-Touch Systems from December 1996 to March 1997 and
Corporate Controller of Thinking Machine, Inc. from July 1994 to December 1996.
Martin J. Wygod became the Chairman of the Board of our company in March
1999. Mr. Wygod has been Chairman of the Board of Synetic since May 1989. From
May 1989 to February 1993, Mr. Wygod also served as Synetic's President and
Chief Executive Officer and until May 1994 was an executive officer of Synetic.
Until May 1994, Mr. Wygod was Chairman of the Board of Medco for more than five
years, and until January 1993 he also served as Chief Executive Officer of
Medco. He is also engaged in the business of racing, boarding and breeding
thoroughbred horses, and is President of River Edge Farm, Inc., which is
engaged in the business of breeding and boarding thoroughbred horses.
James R. Love became a Director of our company in March 1999. Mr. Love
became Executive Vice President -- Finance and Administration of Synetic in
March 1999. Prior to joining Synetic, Mr. Love was a Managing Director, since
1993, in the investment banking group of Merrill Lynch & Co. At Merrill Lynch,
he was most recently responsible for the diversified companies group and the
healthcare products group.
Charles A. Mele became a Director of our company in March 1999. Mr. Mele
has been Executive Vice President -- General Counsel of Synetic since March
1998 and was Vice President-General Counsel from July 1995 to March 1998. Mr.
Mele was an executive officer of Synetic from May 1989 until December 1994 and
was an executive officer of Medco for more than five years, until March 1995.
Mr. Mele is also a director of Comnet Corporation and Group 1 Software, Inc., a
computer software company.
No family relationship exists among any of the directors or executive
officers, except that Martin J. Wygod, Chairman of the Board of our company,
and Paul C. Suthern, Chief Executive Officer and President of our company, are
brothers-in-law. No arrangement or understanding exists between any director or
executive officer and any other person pursuant to which any director or
executive officer was selected as a director or executive officer of our
company. All executive officers are elected annually by the Board and serve at
the discretion of the Board. The individuals above who are employed by Synetic
will continue to hold those positions.
Board Composition
Our Board currently has six members, all of whom are currently executive
officers and/or directors of Synetic. We expect to add two independent Board
members following the offering. Each director holds office until his successor
is duly elected and qualified or until his resignation or removal if earlier.
Committees of the Board
Our Board has established an audit committee and a compensation
committee.
Audit Committee. The audit committee's primary responsibilities are to
meet with and consider suggestions from members of management and our
independent public accountants concerning the financial operations of our
company. The audit committee also reviews the audited financial statements of
our company and considers and recommends the employment of, and approves the
fee arrangement with, independent public accountants for audit functions and
advisory and other consulting services. The audit committee will be comprised
of two independent directors to be appointed after consummation of the
offering.
Compensation Committee. The compensation committee's responsibilities are
to make determinations with respect to salaries and bonuses payable to our
executive officers and to administer our stock option plans. The compensation
committee will be comprised of two independent directors to be appointed after
consummation of the offering.
43
<PAGE>
Compensation of Directors
Our directors who are employees of our company will not receive
additional compensation for serving as directors of the company. Directors who
are not employees of either our company or Synetic will receive cash
compensation.
Executive Compensation
The following table presents information concerning compensation paid for
services to Synetic and our company to our CEO and the next four most highly
compensated executive officers of our company for Fiscal 1998. It is
anticipated that the base salaries following the offering will initially be
generally comparable to present levels of base salary.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
----------------------- Securities All Other
Name and Salary Bonus Underlying Compensation
Principal Position Year ($) ($) Options/SARs ($)
- ------------------ ---- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Paul C. Suthern........... 1998 97,692(1) -- 194,000 --
President & CEO 1997 -- -- -- --
1996 160,000 -- -- --
David M. Margulies........ 1998 175,000 -- 272,728(3) --
Executive Vice
President -- Chief
Scientist 1997 72,019(2) -- 272,728(3) --
Paul M. Bernard........... 1998 116,827 31,250 50,000 --
Vice President -- Chief
Financial Officer
David C. Amburgey......... 1998 103,846 40,000 25,000 --
Vice President --
General Counsel and
Secretary
Roger C. Holstein......... 1998 112,404 225,000(4) -- 1,750(5)
Executive Vice
President --
Sales and Marketing
</TABLE>
- --------
(1) Mr. Suthern became President and CEO of Synetic in March 1998.
(2) Dr. Margulies became an employee of our company after our acquisition of
CareAgents, Inc. on January 23, 1997. As such, only compensation paid
subsequent to January 23, 1997 is reflected above.
(3) These options were originally granted January 23, 1997 and were canceled
and replaced January 7, 1998.
(4) Represents a one time bonus paid to Mr. Holstein upon his execution of his
employment agreement with Synetic. For a description of his employment
agreement, see "Employment Agreements; Holstein Employment Agreement."
(5) Comprised of company matching contributions to the Porex Technologies Corp.
401(k) Savings Plan.
44
<PAGE>
The following table presents information concerning the options to
purchase Synetic common stock granted during the last fiscal year to our CEO
and the next four most highly compensated executive officers of our company for
services rendered to Synetic and our company. We have adopted stock option
plans which contain substantially similar terms and conditions to certain of
Synetic's stock option plans. For a description of such plans, see
"Management -- Compensation Pursuant to Plans and Arrangements of the
Company -- Stock Option Plans."
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
% of Total
Number of Options/
Securities SARs
Underlying Granted to Exercise
Options/ Employees or Base Grant Date
SARs in Fiscal Price Expiration Present
Name Granted (#) Year(2) ($/Sh) Date Value ($)(3)
- ---- ----------- ---------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Paul C. Suthern.... 10,000(1)(4) 0.40% 38.750 7/1/12 145,856
184,000(1) 7.40% 36.875 1/7/08 2,553,898
------- ----- ---------
194,000 7.80% 2,699,754
David M.
Margulies......... 272,728(5) 10.97% 36.875 1/7/08 2,818,841
Paul M. Bernard.... 50,000(1) 2.01% 37.000 7/1/07 624,551
David C. Amburgey.. 25,000(1) 1.01% 36.875 1/7/13 315,242
</TABLE>
- --------
(1) These options vest and become exercisable at the rate of 20% per year,
commencing on the first anniversary of the date of grant and were granted
on the following dates: 10,000 on July 1, 1997 and 184,000 on January 7,
1998 for Mr. Suthern, 50,000 on July 1, 1997 for Mr. Bernard and 25,000 on
January 7, 1998 for Mr. Amburgey. The options to purchase Synetic common
stock will continue to vest and remain exercisable, subject to such
officer's continued employment with Synetic or our company and the terms
and conditions of Synetic's stock option plans.
(2) Based upon the total number of stock options granted to all employees of
Synetic.
(3) The estimated grant date present value as of the most recent fiscal year
end reflected in the above table is determined using the Black-Scholes
model. The material assumptions and adjustments incorporated in the Black-
Scholes model in estimating the value of the options reflected in the above
table include the following: (i) the respective option exercise price,
specified above, equal to the fair market value of the underlying stock on
the date of grant; (ii) the exercise of options within one year of the date
that they become exercisable; (iii) a risk-free interest rate of 6.3% per
annum; and (iv) volatility of 0.2986 calculated using daily prices of
Synetic common stock during the period from the date of purchase of shares
of common stock from Merck & Co. Inc. by Synetic and SN Investors on
December 14, 1994 to June 30, 1998. The ultimate values of the options will
depend on the future market price of Synetic common stock, which cannot be
forecast with reasonable accuracy. The actual value, if any, an optionee
will realize upon exercise of an option will depend on the excess of the
market value of Synetic common stock over the exercise price on the date
the option is exercised. There is no assurance that the value realized by
an optionee will be at or near the value estimated by the Black-Scholes
model or any other model applied to value the options.
(4) These options were awarded to Mr. Suthern while serving as Vice Chairman of
the Board of Synetic under Synetic's 1991 Director Stock Option Plan.
(5) These options vest and become exercisable at the rate of 40%, commencing on
the second anniversary of the date of grant and 20% on each subsequent
anniversary and were granted on January 7, 1998. This grant represents the
replacement of a grant of an option originally issued on January 23, 1997.
For a description of the consequences of a termination of his employment on
such options, see "Employment Agreements; Margulies Employment Agreement."
45
<PAGE>
The following table presents information concerning the value realized
upon the exercise of options to purchase Synetic common stock and the fiscal
year-end value of options to purchase Synetic common stock held by our CEO and
the next four most highly compensated executive officers of our company for
Fiscal 1998.
No options to purchase Synetic common stock were exercised by our CEO and
the next four most highly compensated executive officers of our company for
Fiscal 1998 during the fiscal year ended June 30, 1998.
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-
Options/SARs at Money Options/SARs at
FY-End (#) FY-End ($)(1)
------------------------- -------------------------
Name Unexercisable Exercisable Unexercisable
- ---- Exercisable ------------- ----------- -------------
<S> <C> <C> <C> <C>
Paul C. Suthern............. 234,000 266,000 8,944,500 6,471,500
David M. Margulies.......... -- 272,728 -- 4,670,467
Paul M. Bernard............. 10,000 90,000 191,250 1,615,000
David C. Amburgey........... 15,000 85,000 277,500 1,538,125
Roger C. Holstein........... 108,000 400,000 2,371,750 8,175,000
</TABLE>
- --------
(1) Based upon the Fiscal 1998 closing price of Synetic common stock of $54.00.
Employment Agreements
Margulies Employment Agreement. Synetic entered into an employment
agreement with David M. Margulies, M.D. as of January 23, 1997 in connection
with Synetic's acquisition of CareAgents. Dr. Margulies' employment agreement
provides for an employment period of five years, subject to monthly renewal
thereafter. Dr. Margulies' base salary is $175,000, which may be increased by
the Board of Directors of Synetic in its sole discretion. Dr. Margulies is
entitled to participate in any group insurance, hospitalization, medical,
health and accident, disability, fringe benefit and tax-qualified retirement
plans or programs of Synetic. Dr. Margulies' agreement does not fix Dr.
Margulies' responsibilities or title, other than to provide that he will
provide services to Synetic, CareAgents and their respective affiliates and
subsidiaries, as specified by the Chief Executive Officer or the Board of
Directors of Synetic from time to time.
If his employment is terminated:
. by Synetic for "cause" (as such term is defined in the agreement,
generally consisting of a breach of any material provision of the
agreement, willful misconduct relating to Synetic or its
affiliates, failure to perform his duties in any material respect,
willful violation of laws applicable to the business of Synetic or
its affiliates, commission of a common law fraud or conviction of
a felony or crime involving moral turpitude); or
. due to the resignation of Dr. Margulies for any reason,
Synetic will have no obligation to Dr. Margulies other than the payment of his
earned and unpaid compensation to the effective date of termination.
Termination of employment for any of these reasons will constitute a
"Termination Event" under the Escrow Agreement dated as of January 23, 1997,
among several employees of CareAgents including Dr. Margulies and the United
States Trust Company of New York, as escrow agent,
46
<PAGE>
pursuant to which shares of Synetic common stock owned by Dr. Margulies are
held in escrow to secure, among other things, his obligations under the
Margulies employment agreement. If his employment is terminated:
. by Synetic as a result of Dr. Margulies' permanent disability;
. as a result of Dr. Margulies' death; or
. by Synetic without "cause,"
Synetic will have no obligation to Dr. Margulies other than the payment of his
earned and unpaid compensation to the effective date of termination and as
specified in the stock option agreement described below.
Pursuant to a stock option agreement between Synetic and Dr. Margulies,
Dr. Margulies has been granted nonqualified stock options to purchase 272,728
shares of Synetic common stock. The options become exercisable in the following
manner: 40% on January 7, 2000 and an additional 20% on each of January 7,
2001, January 7, 2002 and January 7, 2003. Upon termination of his employment,
the options will terminate to the extent not vested, unless such termination of
employment is without "cause" or as a result of permanent disability or death,
in which case the options will continue to vest as if he remained in the employ
of Synetic through the earlier of the next date on which additional options
would vest or the occurrence of any circumstance or event that would constitute
"cause."
Dr. Margulies' employment agreement contains confidentiality obligations
that survive indefinitely and non-solicitation and non-competition obligations
which apply for a certain period of time following termination of employment.
All obligations of Synetic may be assigned to any of its affiliates without the
consent of Dr. Margulies.
Bernard Employment Agreement. Avicenna entered into an employment
agreement with Paul M. Bernard as of November 3, 1997. Mr. Bernard's employment
agreement provides for an employment period of two years, subject to monthly
renewal thereafter. Mr. Bernard's base salary is $156,250, which may be
increased by the Board of Directors of Avicenna or Synetic in its sole
discretion. Mr. Bernard is entitled to participate in any group insurance,
hospitalization, medical, health and accident, disability, fringe benefit and
tax-qualified retirement plans or programs of Avicenna. Mr. Bernard's
employment agreement does not fix Mr. Bernard's responsibilities or title,
other than to provide that he will provide services to Avicenna, Synetic and
their respective affiliates and subsidiaries, as specified by the President or
Senior Vice President of Avicenna from time to time.
If his employment is terminated:
. by Avicenna for "cause" (as such term is defined in the agreement,
which is substantially similar to the definition contained in the
Margulies Agreement); or
. due to the resignation of Mr. Bernard for any reason,
Avicenna will have no obligation to Mr. Bernard other than the payment of
his earned and unpaid compensation to the effective date of termination. If
employment is terminated as a result of Mr. Bernard's death, Avicenna will have
no obligation to Mr. Bernard other than a continuation of his base salary in
effect at the time of termination for a period of six months following the date
of termination. If employment is terminated by Avicenna without "cause,"
Avicenna will have no obligation to Mr. Bernard other than a continuation of
his base salary in effect at the time of termination for a period of six months
following the date of termination, although such obligation will end upon:
. the occurrence of a circumstance or event that would constitute
"cause;" or
. the re-employment of Mr. Bernard with Avicenna or its affiliates
or the employment of Mr. Bernard with any other employer at an
annual gross salary of at least $156,250.
47
<PAGE>
If Mr. Bernard is employed at an annual gross salary of less than $156,250, the
base salary continuation will be reduced by such amount.
Mr. Bernard's employment agreement contains confidentiality obligations
that survive indefinitely and non-solicitation and non-competition obligations
which apply for a certain period of time following termination of employment.
Holstein Employment Agreement. Synetic entered into an employment
agreement with Roger C. Holstein as of November 6, 1997. Mr. Holstein's
employment agreement provides for an employment period of five years, subject
to monthly renewal thereafter. Mr. Holstein's base salary is $175,000, which
may be increased by the Board of Directors of Synetic in its sole discretion,
except that when revenues from the healthcare communications business exceed
$30,000,000, the Board of Directors will increase Mr. Holstein's compensation
to a level commensurate with his contribution, as determined in its reasonable
judgement. Mr. Holstein's employment agreement provided for a one-time payment
of $225,000 to Mr. Holstein upon the signing of the agreement. Mr. Holstein is
entitled to participate in any group insurance, hospitalization, medical,
health and accident, disability, fringe benefit and tax-qualified retirement
plans or programs or vacation leave of Synetic. Mr. Holstein's employment
agreement fixes Mr. Holstein's title as Executive Vice President of Synetic,
and provides that his responsibilities will be determined by the Chairman of
the Board of Directors and the Chief Executive Officer of Synetic from time to
time.
If his employment is terminated:
. by Synetic for "cause" (as such term is defined in the agreement,
which is substantially similar to the definition contained in the
Margulies Agreement); or
. due to the resignation of Mr. Holstein for any reason other than
"cause" (as such term is defined in the agreement, generally
consisting of a breach of any material provision, demotion or
relocation),
Synetic will have no obligation to Mr. Holstein other than the payment of his
earned and unpaid compensation to the effective date of termination.
If his employment is terminated:
. by Synetic as a result of Mr. Holstein's permanent disability; or
. as a result of Mr. Holstein's death,
Synetic will have no obligation to Mr. Holstein other than the payment of his
earned and unpaid compensation to the effective date of termination and with
respect to stock options, as specified in the following paragraph.
If his employment is terminated:
. by Synetic without "cause;" or
. by Mr. Holstein for "cause,"
Synetic will have an obligation:
. to pay Mr. Holstein his earned and unpaid compensation to the
effective date of termination and a monthly severance payment
equal to one twelfth of his then applicable base salary (less
required deductions) for a period ending two years from the date
of such termination or until the occurrence of a circumstance or
event that would constitute "cause"; and
. with respect to stock options, as specified in the next paragraph.
48
<PAGE>
In addition, Mr. Holstein has the right to terminate his employment upon 30
days' written notice to Synetic at any time after a 12-month period following
the occurrence of "change of control." A "change of control" will occur if:
. any person, entity or group (excluding Mr. Martin J. Wygod)
acquires at least 50% of the voting power of the outstanding
voting securities of Synetic and following such acquisition Mr.
Wygod ceases to hold one or more of the positions of the Chairman
of the Board of Directors of Synetic, Chief Executive Officer of
Synetic or a senior executive officer of the acquirer of the 50%
voting power (in each case, with duties and responsibilities
substantially equivalent to those prior to such acquisition);
. the occurrence of a reorganization, merger or consolidation or
sale of or other disposition of all or substantially all of
Synetic's assets and following such an event Mr. Wygod ceases to
hold the positions described above; or
. the occurrence of a complete liquidation or dissolution of
Synetic.
In the event of such a termination, his stock options will be treated in the
manner described in the following paragraph.
In the event of termination of Mr. Holstein's employment agreement by
Synetic without "cause" or by Mr. Holstein for "cause," the options to purchase
500,000 shares of Synetic common stock held by Mr. Holstein will remain
outstanding and continue to vest as though Mr. Holstein remained in the employ
of Synetic through the earlier of the second anniversary of the date of
termination and the occurrence of a circumstance or event that would constitute
"cause." In the event of termination of Mr. Holstein's employment agreement by
Mr. Holstein due to a "change in control" or as a result of Mr. Holstein's
death or permanent disability, the options will remain outstanding and continue
to vest as though Mr. Holstein remained in the employ of Synetic through the
earlier of:
. the later of November 6, 2002 and the last date on which such
options actually vest; and
. the occurrence of a circumstance or event that would constitute
"cause."
Mr. Holstein's employment agreement contains confidentiality obligations
that survive indefinitely and non-solicitation and non-competition obligations
which apply for a certain period of time following termination of employment.
All obligations of Synetic may be assigned to any of its affiliates without the
consent of Mr. Holstein.
Compensation Pursuant to Plans and Arrangements of the Company
Set forth below is information with respect to certain benefit plans and
employment arrangements of the company pursuant to which non-cash compensation
was paid or distributed for Fiscal 1998, or is proposed to be paid or
distributed in the future, to the directors and executive officers of our
company. Our executive officers may continue to be included in Synetic's
benefit plans and employment arrangements. Our company would bear a portion of
the costs incurred in connection with such participation.
Under Section 162(m) of the Internal Revenue Code of 1986, as amended,
the deduction for federal income tax purposes by publicly held corporations for
amounts in excess of $1 million paid to certain executive officers is limited
unless such excess compensation is "performance-based" (as defined in Section
162(m)), subject to certain exceptions. Except for the grant of stock options,
currently scheduled compensation of our executive officers will not result in
any excess compensation. We intend to take steps to ensure that compensation
realized upon the exercise of stock options will be "performance-based" as
defined in Section 162(m).
49
<PAGE>
Stock Option Plans
We have adopted the CareInsite, Inc. Officer Stock Option Plan and the
CareInsite, Inc. Employee Stock Option Plan. Our shareholders have also
approved these plans. The following description of each of the plans is
qualified in its entirety by the full text of the plans which is set forth as
an Exhibit to this registration statement. The maximum number of shares of our
common stock that will be subject to options under our employee stock option
plan is and the maximum number of shares of our common stock that will be
subject to options under our officer stock option plan is , subject to
adjustment in accordance with the terms of the plans. Each of the plans limits
the number of options that may be granted thereunder to an eligible optionee in
any one-year period to no more than , although options for up to shares
may be granted pursuant to the plans if the grant is made in order to induce
the optionee to enter into an employment or consultancy relationship with our
company or any of its subsidiaries or affiliates, or to serve as an officer of
the company or any of its subsidiaries or affiliates, as applicable. These
amounts are subject to adjustment in accordance with the terms of the plans.
Each of the plans will be administered by our compensation committee
except as described below, provided that under certain circumstances the
compensation committee may delegate authority to certain designated officers to
make awards under the plans. All of the members of the compensation committee
will be nonemployee directors and "outside directors" within the meaning of
Rule 16b-3 under the Securities Exchange Act of 1934 and Section 162(m) of the
Internal Revenue Code of 1986, as amended, respectively. Until such time as our
compensation committee is established, the stock option committee of Synetic
may grant options under the plans, so long as such action is separately
approved by our board of directors. The grants to be made on the date of this
offering will be approved by our board of directors as well as the stock option
committee of Synetic. The compensation committee will have the authority,
within limitations as set forth in the plans, to determine the persons to whom
options may be granted, the number of shares of common stock to be covered by
each option, the time or times at which the options may be granted or exercised
and the terms and provisions of the options to be granted.
Eligibility for the grant of options under our officer stock option plan
is limited to officers of our company, its subsidiaries and its affiliates, so
long as they perform services for our company or its subsidiaries. Eligibility
for the grant of options under our employee stock option plan is limited to
employees and certain consultants, agents and key contractors of our company,
its subsidiaries and its affiliates, so long as they perform services for our
company or its subsidiaries. Options granted under the plans may be either
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended from time to time, or non-qualified stock
options, as determined by the compensation committee. The exercise price for an
incentive stock option may not be less than 100% (or 110% if the optionee owns
or is deemed to own more than 10% of the total combined voting power of all
classes of stock of our company or a subsidiary or the parent) of the fair
market value of the common stock on the date of grant, as determined in
accordance with the plans. Non-qualified stock options granted under the plans
must have an exercise price of at least 85% (100% in the case of designated
eligible optionees whose compensation may be subject to the limitation on tax
deductible compensation imposed by Section 162(m) of the Internal Revenue Code
of 1986) of the fair market value of the common stock on the date of grant (as
determined in accordance with the plans). If there is a change in control (as
defined below), the compensation committee may provide that options granted
under the plans will become exercisable in whole or in part, whether or not the
options are otherwise exercisable. A change in control is generally defined in
both plans as the occurrence of:
. any person (excluding Synetic and its subsidiaries, our company
and its subsidiaries and certain affiliates of our company, and
our employee benefit plans maintained by Synetic or our company
and its subsidiaries and certain affiliates) becoming the
beneficial owner of 50% or more of the voting power of (a) our
company's securities, or (b) Synetic's voting securities so long
as Synetic is the beneficial owner of 50% or more our voting
securities;
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. during a 24-month period the individuals who, at the beginning of
such period, constituted our company's board of directors cease to
be a majority of such board of directors unless such new directors
were elected or recommended by the individuals who, at the
beginning of such period, constituted our company's board of
directors;
. during a 24-month period the individuals who, at the beginning of
such period, constituted Synetic's board of directors cease to be
a majority of such board of directors unless such new directors
were elected or recommended by the individuals who, at the
beginning of such period, constituted Synetic's board of
directors, but only if, at the time such individuals cease to be a
majority of Synetic's board of directors, Synetic is the
beneficial owner of 50% or more of our voting securities;
. the approval by the stockholders of our company of a merger or
consolidation of our company, without the consent of a majority of
the individuals who, immediately prior to such merger or
consolidation, constituted our company's or Synetic's board of
directors;
. the approval by the stockholders of Synetic of a merger or
consolidation of Synetic, without the consent of a majority of the
individuals who, immediately prior to such merger or
consolidation, constituted Synetic's board of directors, but only
if at the time of such approval Synetic is the beneficial owner of
50% or more of our voting securities;
. stockholder approval of a sale of all or substantially all of the
assets of (a) our company, or (b) Synetic, so long as Synetic is
the beneficial owner of 50% or more of our voting securities; or
. adoption of a plan of liquidation of (a) our company, or (b)
Synetic, so long as Synetic is the beneficial owner of 50% or more
of our voting securities.
No option will become exercisable due to a change in control of Synetic,
unless, immediately preceding such change in control, Synetic was in "control"
of our company. In addition, the compensation committee may determine at the
time of grant or thereafter that an option shall become exercisable in full or
in part upon the occurrence of such circumstances or events as the compensation
committee determines merit special consideration.
Each of the plans may be terminated and may be modified or amended by the
board of directors or compensation committee at any time; provided, however,
that:
. no modifications or amendment will be effective without
stockholder approval if such approval is required by law or under
the rules of the Nasdaq National Market or any stock exchange on
which our common stock is listed; and
. no such termination, modification or amendment may adversely alter
or affect the terms of any then outstanding options previously
granted without the consent of the affected optionee.
Synetic Plans
Our CEO and the next four most highly compensated executive officers of
our company for fiscal 1998 have been granted options to purchase shares of
Synetic common stock pursuant to Synetic's stock option plans. See
"Management -- Executive Compensation." The Synetic option plans are
administered by a stock option committee of Synetic and contain terms and
conditions which are substantially similar to the terms of our stock option
plans. Subject to the terms and conditions of Synetic's stock option plans, the
Synetic options will continue to vest and remain outstanding so long as the
respective officers remain in the employ of our company.
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SECURITY OWNERSHIP OF MANAGEMENT
Prior to the offering, Synetic owned 80.1% of our outstanding common
stock through its wholly owned subsidiary, Avicenna Systems Corporation. Prior
to the offering, all other outstanding shares of our common stock were owned by
Cerner. Synetic's address is River Drive Center II, 669 River Drive, Elmwood
Park, New Jersey, 07407 and Cerner's address is 2800 Rock Creek Parkway, Suite
601, Kansas City, Missouri, 64117. None of our directors or executive officers
beneficially own any of our common stock. The following table, however, sets
forth information with respect to the beneficial ownership of Synetic common
stock as of April 9, 1999 by our directors, each of our CEO and the next four
most highly compensated executive officers of our company for Fiscal 1998, and
all of our directors and executive officers as a group. Except as indicated by
footnote, and subject to applicable community property laws, the persons named
in the table have sole voting and investment power with respect to all shares
of Synetic common stock shown as beneficially owned by them. The number of
shares of Synetic common stock deemed outstanding used in calculating the
percentage for each listed person includes: (1) 20,481,538 shares of Synetic
common stock outstanding as of April 9, 1999, (2) the number of shares of
Synetic common stock that the respective persons named in the above table have
the right to acquire presently or within 60 days of April 9, 1999 upon exercise
of stock options and (3) the number of shares of Synetic common stock that the
respective persons named in the above table have the right to acquire upon
conversion of Convertible Debentures.
<TABLE>
<CAPTION>
Shares of Synetic
Common Stock
Beneficially Percent of
Name Owned(1) Class
---- ----------------- ----------
<S> <C> <C>
Paul C. Suthern.......................... 340,298(3)(4) 1.64%
David M. Margulies....................... 28,917 *
Paul M. Bernard.......................... -- *
David C. Amburgey........................ 35,026 *
Roger C. Holstein........................ 159,363 *
Martin J. Wygod.......................... 5,603,742(2)(3)(5) 26.79%
James R. Love............................ -- *
Charles A. Mele.......................... 348,378(2) 1.69%
Directors and executive officers as a
group (9 persons)....................... 6,291,931 29.21%
</TABLE>
- --------
* Less than 1% of the shares outstanding of the class.
(1) The number of shares of common stock beneficially owned includes the
following number of shares of Synetic common stock that the following
persons have the right to acquire on or within 60 days of April 9, 1999
upon exercise of stock options and upon conversion of Synetic's 5%
Convertible Subordinated Debentures Due 2007: Mr. Holstein, 158,833; Mr.
Mele, 125,833; Mr. Suthern, 305,300; Mr. Wygod, 212,000; Mr. Amburgey,
35,000 and all directors and executive officers as a group, 836,966. The
number of shares also includes 55 shares of Synetic common stock allocated
to the account of Mr. Holstein, 194 shares of Synetic common stock
allocated to the account of Mr. Mele and 26 shares of Synetic common stock
allocated to the account of Mr. Amburgey under the Porex 401(k) Savings
Plan as of September 30, 1998.
(2) Includes 186,961 shares of Synetic common stock and shares of Synetic
common stock issuable upon conversion of $500,000 principal amount of
Convertible Debentures owned by the Rose Foundation, a charitable
foundation of which Messrs. Mele and Wygod are trustees and share voting
and dispositive power.
(3) Includes 3,500 shares of Synetic common stock and shares of Synetic common
stock issuable upon conversion of $1,500,000 principal amount of
Convertible Debentures owned by the Synetic Foundation,
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formerly known as the Medco Containment Services Foundation, Inc., a
charitable foundation of which Messrs. Suthern and Wygod are trustees and
share voting and dispositive power.
(4) Includes 1,200 shares of Synetic common stock held in custodial accounts
for Mr. Suthern's children.
(5) Includes 2,000 shares of Synetic common stock beneficially owned by Mr.
Wygod's spouse, as to which shares Mr. Wygod disclaims beneficial
ownership.
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TRANSACTIONS AND RELATIONSHIPS WITH PRINCIPAL STOCKHOLDERS
Security Ownership
Prior to the offering, 80.1% of our capital stock was owned by Avicenna
Systems Corporation, a wholly owned subsidiary of Synetic and 19.9% was owned
by Cerner. Upon completion of the offering and the concurrent private sale of
600,000 shares of our common stock to Cerner, Synetic will own 50,062,500
shares, or approximately 72.8% of the outstanding shares of our common stock
and Cerner will own approximately 13,037,500 shares, or approximately 19.0% of
the outstanding shares of our common stock. In addition, THINC owns a warrant
which, six months after the completion of the offering, may be exercised for
4,059,118 shares. If THINC exercises this warrant, Cerner has a related warrant
entitling it to purchase such additional shares equal to 19.9% of the shares
purchased by THINC in connection with the exercise of THINC's warrant. In
addition, we will issue to Cerner approximately 2,503,125 shares of our common
stock on or after February 15, 2001 at a price of $.01 per share if we realize
a specified level of physician usage of our services. Synetic will have the
ability to control the vote on matters submitted to a vote of our stockholders
and will also be able to elect all of the directors of our company. Certain of
our directors and executive officers own shares of Synetic common stock. See
"Security Ownership of Management."
Conflicts of Interest
Upon completion of the offering, Synetic will retain effective control of
our company and may be in a position to cause us to merge, consolidate,
liquidate or sell all or a substantial portion of our assets on terms
determined by Synetic. Certain of Synetic's officers and directors are officers
or directors of our company. Such directors and officers of our company who are
also directors or officers of Synetic are in positions which may expose them to
conflicts of interest. Such conflicts of interest may arise in connection with
transactions involving business dealings between our company and Synetic, the
allocation of acquisition opportunities, the issuance of additional shares of
our common stock or other securities of our company and other matters involving
conflicts that cannot now be foreseen.
It is contemplated that, after the offering, a majority of the directors
and officers of our company will also be directors and/or officers of Synetic
and will continue to spend a substantial amount of their business time as
directors or officers of Synetic and its other subsidiaries and may be engaged
in other business activities, consistent with their other employment
agreements, if any. For a list of those officers and directors of our company
who are also directors and/or officers of Synetic, and the positions they hold
with each company, see "Management--Directors and Executive Officers."
Stockholders Agreement
We are party to a stockholders agreement with Synetic, Avicenna and
Cerner, dated January 2, 1999, which terminates on the later of January 2, 2004
and the date upon which Cerner ceases to own any of our common stock. Among
other things, the stockholders agreement prohibits Synetic or Avicenna from
entering into transactions with us other than at arm's length, specifies
restrictions on the transfer of shares of our common stock by Cerner, other
than to its affiliates, and provides that, after January 2, 2001, Cerner may
make two demands for registration of our common stock, subject to customary
limitations. This stockholders agreement also provides Cerner the right to buy
shares of our common stock in a private transaction concurrent with this
offering.
Certain Agreements
Our company and Synetic have entered into or will enter into a number of
agreements for the purpose of defining the ongoing relationship between the two
companies. Additional or modified agreements, arrangements and transactions may
be entered into by us and Synetic after the completion of the offering. Any
such future agreements, arrangements and transactions will be determined
through negotiations between our
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company and Synetic, as the case may be. Following the offering, we will
continue to be controlled by Synetic and consequently such negotiations will
not be arm's-length.
The following is a summary of certain existing or proposed agreements
between our company and Synetic. We believe these agreements were, or will be,
made on terms no less favorable to us than could have been obtained from
unaffiliated third parties. See Note 6 of the Notes to Consolidated Financial
Statements.
Tax Sharing Agreement. Upon completion of the offering, our company will
cease to file a consolidated federal income tax return with Synetic, but will
continue to file a combined tax return with Synetic for California income tax
purposes. Our company and Synetic will enter into a tax sharing agreement
providing that, for periods prior to the offering and during which our company
was included in Synetic's consolidated federal income tax returns, our company
will be required to pay Synetic an amount equal to our federal income tax
liabilities for these periods, determined as if our company had filed federal
income tax returns on a separate company basis. Additionally, for periods both
before and after the offering, in situations where our company files a combined
return with Synetic for state income tax purposes, such as for California, we
will be required to pay Synetic an amount equal to our state income tax
liabilities, determined as if our company had filed state income tax returns on
a separate company basis. If our company experiences a net operating loss
resulting in no federal or state income tax liability for a taxable period in
which it was included in Synetic's consolidated federal or combined state
income tax returns, our company will be entitled to a payment from Synetic
equal to the reduction, if any, in the federal or state income tax liability of
the Synetic consolidated group by reason of the use of our company's net
operating loss. Further, under the tax sharing agreement, if we receive a net
tax benefit for certain equity based compensation arrangements involving
Synetic stock, or for the payment by Synetic of certain litigation expenses and
damages pursuant to the terms of an indemnification agreement between us and
Synetic as described below, then we are required to pay an amount equal to
those tax benefits to Synetic when they are actually realized by us. The tax
sharing agreement also will provide for Synetic to conduct tax audits and tax
controversies on our behalf for periods, and with respect to returns, in which
we are included in the Synetic consolidated or combined returns.
Services Agreement. Our company and Synetic have entered into a services
agreement dated as of January 1, 1999, pursuant to which Synetic will provide
our company with certain administrative services which may include payroll,
accounting, business development, legal, tax, executive services and
information processing and other similar services. Our company will pay the
actual costs of providing these services. Such costs will include an allocable
portion of the compensation and other related expenses of employees of Synetic
who serve as officers of our company. This agreement will be terminable by
either party upon 60 days' prior written notice in certain events, or by
Synetic, at any time, if Synetic ceases to own at least 50% of the voting stock
of our company. The services agreement shall terminate by its terms, if not
previously terminated or renewed, on January 1, 2004.
Indemnification Agreement. Our company and Synetic will enter into an
indemnification agreement, under the terms of which our company will indemnify
and hold harmless Synetic, on an after tax basis, with respect to any and all
claims, losses, damages, liabilities, costs and expenses that arise from or are
based on the operations of the business of our company before or after the date
of the consummation of the offering. Similarly, Synetic will indemnify and hold
harmless our company, on an after tax basis, with respect to any and all
claims, losses, damages, liabilities, costs and expenses that arise from or are
based on the operations of Synetic other than the business of our company
before or after the date of the consummation of the offering. With respect to
the Merck litigation, this agreement provides that Synetic will bear both the
actual costs of conducting the litigation and any monetary damages that may be
awarded to Merck and Merck-Medco in the litigation. The agreement further
provides that any damages awarded to our company and Synetic in the litigation
will be for the account of Synetic. Finally, the agreement provides that
Synetic shall not be responsible for any losses suffered by CareInsite
resulting from any equitable relief obtained by Merck and Merck-Medco against
CareInsite, including, but not limited to, any lost profits, other losses,
damages, liabilities, or costs or expenses arising from such equitable relief.
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The following is a summary of certain agreements we have entered into
with THINC and Cerner.
THINC. In January 1999, our company, THINC, and THINC's founding
members, Greater New York Hospital Association, Empire, Group Health
Incorporated and HIP Health Plans entered into definitive agreements and
consummated a transaction for a broad strategic alliance. Under this
arrangement, among other things, our company:
. acquired a 20% ownership interest in THINC in exchange for $1.5
million in cash and a warrant to purchase an aggregate of
4,059,118 shares of common stock of our company, referred to as
the THINC warrant;
. agreed to extend up to $2,000,000 and $1,500,000 in senior loans
to THINC;
. entered into a Management Services Agreement with THINC pursuant
to which our company will manage all operations of THINC,
including, as part of our services, providing THINC with certain
content and messaging services, and THINC will provide our company
with the right to deploy our prescription and laboratory
communication services on the THINC network on behalf of the
payers;
. licensed to THINC our content and messaging services for use over
the THINC network; and
. entered into Clinical Transaction Agreements with each of Empire,
Group Health Incorporated and HIP, who we refer to together as the
"THINC Payers," to provide online prescription and laboratory
communication services.
Our Clinical Transaction Agreement with Group Health Incorporated
specifies that we do not have the right to provide prescription communication
services to Group Health Incorporated unless either we enter into an agreement
with Group Health Incorporated's pharmacy benefit manager outlining a
methodology for the implementation of such services or Group Health
Incorporated elects to proceed without such an agreement. Group Health
Incorporated's current pharmacy benefit manager is Merck-Medco. To date, we
have not entered into any such agreement with Merck-Medco and Group Health
Incorporated has not made such election. See "Risk Factors -- Litigation by
Merck & Co., Inc. and Merck-Medco Managed Care, L.L.C. against our company."
In connection with our entering into a strategic relationship with
Cerner, we sold to Cerner the economic rights to 2% of THINC, although we
retain registered ownership and voting control over that interest, and Cerner
has agreed to fund $1,000,000 of our $2,000,000 senior loan to THINC.
As part of this arrangement, THINC entered into Managed Care Transaction
Contracts with each of the THINC payers whereby the THINC payers agreed to use
the THINC network for their online medical claims submission, eligibility,
benefit plan detail, roster distribution, remittance advice distribution,
claims inquiry, referral/pre-certification and authorization, and encounter
submission transactions.
The THINC warrant is exercisable 180 days following the occurrence of an
initial public offering of CareInsite's common stock or, if an initial public
offering has not occurred, at the end of term of the THINC warrant, into an
aggregate of 4,059,118 shares of the common stock of our company. The exercise
price per share of the THINC warrant is the lesser of:
. the price per share of common stock issued in the initial public
offering price of our common stock, if an initial public offering
has occurred; and
. $4.00 per share.
The THINC warrant expires on January 1, 2006, subject to certain
exceptions. The THINC warrant and the shares of our common stock issuable upon
the exercise of the THINC warrant are subject to certain restrictions on
transfer.
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Cerner. In January 1999, our company also entered into definitive
agreements and consummated a transaction with Cerner for a broad strategic
alliance. Cerner, a publicly traded corporation, is a supplier of clinical and
management information systems for healthcare organizations. Under this
arrangement, our company, among other things, obtained a perpetual, royalty-
free license to the Cerner technology in exchange for a 19.9% equity interest
in our company. Such equity interest is subject to certain restrictions on
transfer and other adjustments. In addition, we have issued to Cerner a warrant
to purchase up to 807,764 shares of common stock at $4.00 per share,
exercisable only in the event THINC exercises its warrant. Also, we will issue
to Cerner approximately 2,503,125 shares of our common stock on or after
February 15, 2001 at a price of $.01 per share if we realize a specified level
of physician usage of our services. In connection with our strategic
relationship with Cerner, we sold Cerner the economic rights to 2% of THINC.
Additionally, Cerner has agreed to fund $1,000,000 of our $2,000,000 senior
loan to THINC. Our company and Cerner have entered into a non-competition
agreement and, as a result, agreed that our company will be their exclusive
vehicle for providing a full suite of prescription, laboratory and managed care
transaction and messaging services that connect physician's offices with
managed care organizations, pharmacy benefit managers, clinical laboratories,
pharmacies and other providers. We also entered into a marketing agreement that
allows for the marketing and distribution of our services to the physicians and
providers associated with more than 1,000 healthcare organizations who
currently utilize Cerner's clinical and management information system. Our
company and Cerner also agreed to promote each other's services to their
respective customers. In addition, Cerner committed to make available to our
company engineering and systems architecture personnel and expertise to
accelerate the deployment of CareInsite's services, as well as ongoing
technical support and future enhancements to the licensed Cerner technology.
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DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company is subject
to the Delaware General Corporation Law and to provisions contained in the
Company's Certificate of Incorporation and By-Laws, copies of which are
exhibits to this prospectus. Reference is made to such exhibits for a detailed
description of the provisions thereof summarized below.
Our authorized capital consists of 300,000,000 shares of common stock,
par value $.01 per share, and 30,000,000 shares of preferred stock, $0.01 par
value per share. Immediately prior to the offering, 62,500,000 shares of our
common stock were issued and outstanding. Immediately following the offering
and the concurrent private sale of 600,000 shares of our common stock to
Cerner, 68,750,000 shares of our common stock will be issued and outstanding.
Holders of common stock have no preemptive or other subscription rights.
Common Stock
Holders of record of common stock are entitled to one vote per share on
all matters upon which shareholders have the right to vote. There are no
cumulative voting rights or preemptive rights. Therefore, holders of more than
50% of the shares of common stock are able to elect all our directors eligible
for election each year. All issued and outstanding shares of our common stock
are, and the common stock to be sold in the offering, when issued and paid for,
will be, validly issued, fully paid and non-assessable. Holders of our common
stock are entitled to such dividends as may be declared from time to time by
our Board of Directors out of funds legally available for that purpose. We do
not anticipate paying any cash dividends in the foreseeable future. See
"Dividend Policy." Upon dissolution, holders of our common stock are entitled
to share pro rata in the assets of our company remaining after payment in full
of all of our liabilities and obligations, including payment of the liquidation
preference, if any, of any preferred stock then outstanding. There are no
redemption or sinking fund provisions applicable to the common stock.
Preferred Stock
There are no shares of preferred stock outstanding. Series of the
preferred stock may be created and issued from time to time by our board of
directors, with such rights and preferences as they may determine. Because of
its broad discretion with respect to the creation and issuance of any series of
preferred stock without stockholder approval, the Board of Directors could
adversely affect the voting power of common stock. The issuance of preferred
stock may also have the effect of delaying, deferring or preventing a change in
control of our company.
Section 203 of the Delaware General Corporation Law
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless:
. prior to such date, the board of directors approved either the
business combination or the transaction that resulted in the
stockholder becoming an interested stockholder,
. upon consummation of the transaction that resulted in such person
becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding, for
purposes of determining the number of shares outstanding, shares
owned by certain directors or certain employee stock plans), or
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. on or after the date the stockholder became an interested
stockholder, the business combination is approved by the board of
directors and authorized by the affirmative vote (and not by
written consent) of at least two-thirds of the outstanding voting
stock excluding that stock owned by the interested stockholder.
A "business combination" includes a merger, asset sale or other
transaction resulting in a financial benefit to the interested stockholder. An
"interested stockholder" is a person who (other than the corporation and any
direct or indirect majority-owned subsidiary of the corporation), together with
affiliates and associates, owns (or, as an affiliate or associate, within three
years prior, did own) 15% or more of the corporation's outstanding voting
stock. The application of Section 203 could have the effect of delaying or
preventing a change of control of our company.
Indemnification
Our by-laws require us to indemnify each of our directors and officers to
the fullest extent permitted by law and limits the liability of our directors
and stockholders for monetary damages in certain circumstances.
Article Six of our certificate of incorporation provides that no director
shall have any personal liability to the Company or its stockholders for any
monetary damages for breach of fiduciary duty as a director, provided that such
provision does not limit or eliminate the liability of any director:
. for any breach of such director's duty of loyalty to the Company
or its stockholders,
. for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law,
. under Section 174 of the Delaware General Corporation Law
(involving certain unlawful dividends or stock repurchases) or
. for any transaction from which such director derived an improper
personal benefit.
Any amendment to such article will not affect the liability of any
director for any act or omission occurring prior to the effective time of such
amendment.
Transfer Agent and Registrar
We have appointed Registrar and Transfer Company as the transfer agent
and registrar for our common stock.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. No information is currently available and no prediction can be made as
to the timing or amount of future sales of shares, or the effect, if any, that
market sales of shares or the availability of shares for sale will have on the
market price prevailing from time to time. Nevertheless, sales of substantial
amounts of our common stock, including shares issuable upon exercise of stock
options or warrants, in the public market after the lapse of the legal and
contractual restrictions, including lock-up agreements, described below, or the
perception that such sales may occur, could materially and adversely affect the
prevailing market prices for our common stock and our ability to raise equity
capital in the future. See "Risk Factors -- Future sales of shares of our
common stock could affect our stock price."
After completion of this offering, we will have an aggregate of
68,750,000 shares of common stock outstanding, assuming no exercise of the
Underwriters' over-allotment option. All of the 5,650,000 shares of our common
stock offered in this offering will be freely tradeable without restriction or
further registration under the Securities Act, unless purchased by "affiliates"
of our company, as that term is defined in Rule 144 under the Securities Act.
The 600,000 shares of common stock to be purchased by Cerner in a private
transaction concurrent with this offering are subject to contractual
restrictions on transfer described below and will be "restricted shares," as
that term is defined in Rule 144, and may not be sold in the absence of
registration other than in accordance with Rule 144 or another exemption from
registration under the Securities Act which rules are summarized below. In
addition, the 12,437,500 shares of our common stock held by Cerner, which were
acquired prior to this transaction, will be subject to the contractual
restrictions described below and will also be "restricted securities," subject
to the same Securities Act retrictions. The remaining 50,062,500 shares of
common stock outstanding upon completion of this offering are held by Synetic
and will also be "restricted securities," subject to the same Securities Act
restrictions.
As a result of the contractual restrictions described below and the
provisions of Rules 144 and 144(k) described below, additional shares will be
available for sale in the public market as follows:
. no shares of common stock, other than those sold hereby and not
held by affiliates, will be available for immediate sale in the
public market on the date of this prospectus,
. any shares of common stock sold hereby and purchased by affiliates
will be eligible for sale 90 days after the date of this
prospectus, subject to the volume, manner of sale and reporting
requirements of Rule 144,
. approximately 50,062,500 shares of common stock, all of which are
held by Synetic, will be eligible for sale upon expiration of the
lock-up agreements days after the date of this prospectus,
subject to the volume, manner of sale and reporting requirements
of Rule 144,
. approximately 12,437,500 shares of common stock acquired by Cerner
prior to this offering will be eligible for sale, subject to the
volume, manner of sale and reporting requirements of Rule 144,
after January 2, 2000. These shares may also be sold pursuant to
Cerner's registration rights after January 2, 2001, if not
previously sold pursuant to Rule 144 or another exemption from
registration under the Securities Act, and
. the 600,000 shares of our common stock purchased by Cerner in a
private transaction concurrent with this offering will be eligible
for sale days after the date of this prospectus, upon
expiration of certain contractual restrictions, subject to the
volume, manner of sale and reporting requirements of Rule 144.
In addition, THINC and Cerner own warrants exercisable for an aggregate
of 4,866,882 shares of our common stock, which warrants cannot be exercised
until 180 days after the completion of this offering. We will also issue to
Cerner approximately 2,503,125 shares of our common stock on or after February
15, 2001 at a price of $.01 per share if we realize specified levels of
physician usage of our services.
60
<PAGE>
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days
after the date of this prospectus, a person who has beneficially owned shares
of our common stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding, which
will equal approximately 687,500 shares immediately after this
offering and the concurrent private sale of 600,000 shares of our
common stock to Cerner; and
. the average weekly trading volume of the common stock on the
Nasdaq National Market during the four calendar weeks preceding
the filing of a notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about us.
Rule 144(k)
Under Rule 144(k), a person who is not one of our affiliates at any time
during the three months preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, including the holding period
of any prior owner other than an affiliate, is entitled to sell such shares
without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore, unless otherwise
restricted, "144(k) shares" may be sold immediately upon the completion of this
offering.
Stock Plans
We plan to file a registration statement to register shares of common
stock reserved for issuance under our stock option plans. See "Management --
Compensation Pursuant to Plans and Arrangements of the Company -- Stock Option
Plans." Once registered, persons acquiring such shares upon exercise of their
options, whether or not they are affiliates, will be permitted to resell their
shares in the public market without regard to the Rule 144 holding period.
Registration Rights
Upon completion of this offering, Cerner will be entitled to certain
rights with respect to the registration of shares under the Securities Act
after January 2, 2001. Registration of such shares under the Securities Act
would result in such shares, except for shares purchased by affiliates,
becoming eligible for sale immediately upon the effectiveness of such
registration. In addition, THINC may exercise demand registration rights
requiring us to register for sale any shares issued pursuant to the exercise of
its warrant beginning any time after January 1, 2001.
Lock-up Agreements and Contractual Restrictions
Upon consummation of this offering and the concurrent private sale of
600,000 shares of our common stock to Cerner, Synetic and Cerner will own
approximately 72.8% and 19.0% of our outstanding common stock, respectively.
Synetic and Cerner have advised us that they currently have no plans to reduce
their respective ownership interests following this offering. However, Synetic
is not subject to any contractual obligation to retain its controlling
interest, except that Synetic has agreed not to sell or otherwise dispose of
any shares of our company for a period of days after the date of this
prospectus without the prior written consent of Merrill Lynch. In addition,
subject to certain exceptions, we have agreed not to sell or otherwise dispose
of any shares of our common stock for such -day period without the prior
written consent of Merrill Lynch. See "Underwriting." Pursuant to a
stockholders agreement, Cerner is prohibited from transferring any of the
shares of our common stock acquired in the separate, private transaction
concurrent with this offering, prior to days after the date of this
prospectus. See "Transactions and Relationships with Principal Stockholders --
Stockholders Agreement."
61
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement
(the "Purchase Agreement") between our company and each of the underwriters
named below, we agreed to sell to each of the underwriters, and each of the
underwriters, for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Warburg Dillon Read, as joint book runners, are acting as representatives, have
agreed to purchase from us, the number of shares of common stock set forth
opposite its name below:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..............................................
Warburg Dillon Read LLC............................................
---------
Total.......................................................... 5,650,000
=========
</TABLE>
The Purchase Agreement provides that the obligations of each of the
underwriters are subject to certain conditions and that when all those
conditions are satisfied each of the underwriters will be obligated to purchase
all of the shares of common stock offered in this offering. In the event of
default by an underwriter, under the Purchase Agreement the commitments of non-
defaulting underwriters may be increased.
The representatives have advised us that the underwriters propose
initially to offer the shares of common stock to the public at the initial
public offering price set forth on the cover page of this prospectus, and to
certain dealers at such price less a concession not in excess of $ per
share of common stock. The underwriters may allow, and those dealers may
reallow, a discount not in excess of $ per share of common stock on sales
to certain other dealers. After the initial public offering, the public
offering price, concession and discount may be changed.
The following table shows the per share and total public offering price,
underwriting discount to be paid by us to the underwriters and the proceeds of
the sale of shares to the underwriters before expenses to us. This information
is presented assuming either no exercise or full exercise by the underwriters
of their over-allotment option.
<TABLE>
<CAPTION>
Total
--------------
Without With
Per Share Option Option
--------- ------- ------
<S> <C> <C> <C>
Public offering price............................... $ $ $
Underwriting discount............................... $ $ $
Proceeds, before expenses, to our company........... $ $ $
</TABLE>
We have granted to the underwriters an option, exercisable for up to 30
days after the date of this prospectus, to purchase up to an aggregate of
847,500 additional shares of common stock at the initial public offering price
set forth on the cover of this prospectus less the underwriting discount to
cover over-allotments, if any, made on the sale of the common stock offered
hereby. If the underwriters exercise the over-allotment option, the
underwriters have agreed, subject to certain conditions, to purchase
approximately the same percentage of the additional shares that the number of
shares of common stock to be purchased by each of them as shown in the
foregoing table bears to the 5,650,000 shares of common stock offered in this
offering. The
62
<PAGE>
underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the shares of common stock offered hereby.
At our request, the underwriters have reserved for sale, at the initial
public offering price, 565,000 of the shares offered hereby to be sold to
certain directors, officers, employees and consultants of our company, of
Synetic and of Cerner, and to certain other persons. The number of shares of
our common stock available for sale to the general public will be reduced to
the extent these persons purchase the reserved shares. Any reserved shares
which are not orally confirmed for purchase within one day of the pricing of
this offering will be offered by the underwriters to the general public on the
same terms as the other shares offered in this offering.
Cerner has agreed to purchase directly from us in a separate, private
transaction concurrent with this offering, 600,000 shares of our common stock
at a price equal to the initial public offering price per share less the
underwriting discount.
Our company and each of our directors, officers and stockholders have
agreed that, for a period of days after the date of this prospectus,
subject to certain exceptions, they will not without the prior written consent
of Merrill Lynch, directly or indirectly:
. offer, pledge, sell, agree to sell, grant any option, right or
warrant for the sale of, or otherwise dispose of or transfer, any
shares of our common stock or securities convertible into or
exchangeable or exercisable for our common stock, whether now
owned by them or acquired by them in the future, or over which
they now have or acquire power of disposition, or file a
registration statement under the Securities Act with respect to
the offering of any shares of our common stock; or
. enter into any swap or other agreement that transfers, in whole or
in part, the economic consequence of ownership of our common stock
whether any such swap or transaction is to be settled by delivery
of common stock or other securities, in cash or otherwise.
The foregoing restrictions shall not apply to the shares of our common
stock to be sold hereunder or, with respect to our company, any shares of our
common stock issued or options to purchase shares of our common stock granted
pursuant to existing employee benefit or stock option plans referred to in this
prospectus or any shares of our common stock or any such securities or rights
issued in connection with investments in, acquisitions of, or mergers or other
combinations with, other companies.
Before this offering, there has been no public market for our common
stock. The initial public offering price will be determined through
negotiations between our company and the representatives. The factors
considered in determining the initial public offering price, in addition to
prevailing market conditions, are
. price-to-revenues ratios of publicly traded companies that the
representatives believe to be comparable to our company,
. certain financial information of our company,
. the history of, and the prospects for, our company and the
industry in which it competes,
. an assessment of our management, our past and present operations,
the prospects for, and timing of, future revenues of our company,
. the present state of our development, and
. the above factors in relation to market values and various
valuation measures of other companies engaged in activities
similar to our company.
We expect our common stock to be approved for listing on the Nasdaq
National Market, subject to notice of issuance, under the symbol " ."
However, there can be no assurance that an active trading
63
<PAGE>
market will develop for our common stock or that our common stock will trade in
the public market subsequent to the offering at or above the initial public
offering price.
The underwriters do not expect sales of the common stock to any accounts
over which they exercise discretionary authority to exceed 5% of the number of
shares of common stock being offered in this offering.
We have agreed to indemnify the underwriters against, or to contribute to
payments the underwriters may be required to make in respect of certain
liabilities, including certain liabilities under the Securities Act.
Until the distribution of the shares of common stock is completed, rules
of the Securities and Exchange Commission may limit the ability of the
underwriters and certain selling group members to bid for and purchase our
common stock. As an exception to these rules, the representatives are permitted
to engage in certain transactions that stabilize the price of our common stock.
These transactions may include bids or purchases for the purpose of pegging,
fixing or maintaining the price of our common stock.
If the underwriters create a short position in our common stock in
connection with the offering, i.e., if they sell a larger number of shares of
common stock than are set forth on the cover page of this prospectus, the
representatives may reduce that short position by purchasing common stock in
the open market. The representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described
above.
The representatives may also impose a penalty bid on certain underwriters
and selling group members. This means that if the representatives purchase
shares of common stock in the open market to reduce the underwriters' short
position or to stabilize the price of our common stock, they may reclaim the
amount of the selling concession from the underwriters and selling group
members who sold those shares as part of this offering.
If the representatives purchase the common stock to stabilize the price
or to reduce the underwriters' short position, the price of our common stock
could be higher than it might be in the absence of such purchases. The
imposition of a penalty bid might also have an effect on the price of our
common stock to the extent that it discourages resales of our common stock.
Neither our company nor any of the underwriters makes any representation
or prediction as to the direction or magnitude of any effect that any of the
transactions described above may have on the price of the common stock. In
addition, neither our company nor any of the underwriters makes any
representation that the representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
Merrill Lynch, from time to time, performs investment banking and other
financial services for our company, Synetic and affiliates of each of these
companies.
We will pay all of the expenses of the offering, excluding underwriting
discounts, and we estimate that these expenses will be approximately $ .
64
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Shearman & Sterling, New York, New York. Certain legal matters
in connection with the offering will be passed upon for the Underwriters by
Brown & Wood LLP. Shearman & Sterling is a limited partner in SN Investors,
L.P. SN Investors is a limited partnership the general partner of which is
SYNC, Inc., whose sole stockholder is Martin J. Wygod, Chairman of our company
and Synetic. SN Investors currently holds 5,061,857 shares of Synetic common
stock.
EXPERTS
The audited financial statements of CareInsite, Inc. and Avicenna Systems
Corporation included in this registration statement have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports
with respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said reports.
The audited financial statements of The Health Information Network
Connection, LLC included in this registration statement have been audited by
KPMG LLP, independent public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said report.
The statements of law under the caption "Risk Factors -- Government
regulation of the Internet and/or healthcare e-commerce services could
adversely affect our business" and under the caption "Business -- Government
Regulation" in this prospectus are based upon the opinion of Kegler, Brown,
Hill & Ritter Co., L.P.A., Columbus, Ohio, special regulatory counsel to the
Company. Robert D. Marotta, Esq., of counsel to such firm, holds 75,000 options
to purchase Synetic common stock.
ADDITIONAL INFORMATION
We have filed with the Commission a registration statement on Form S-1
under the Securities Act with respect to the shares of common stock offered
hereby. For the purposes hereof, the term "registration statement" means the
original registration statement and any and all amendments thereto. This
prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules thereto. For further
information with respect to our company and such common stock, reference is
hereby made to such registration statement, including exhibits thereto, which
can be inspected and copied at the public reference facilities maintained by
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Regional Offices of the Commission at Seven World Trade Center, New York, New
York 10048 and 500 West Madison Street, Chicago, Illinois 60661. Copies of such
material can also be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates.
The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of such site is
http://www.sec.gov.
Statements contained in the prospectus as to the contents of any contract
or other document are not necessarily complete, and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the registration statement, each such statement being qualified in all respects
by such reference.
We are not currently subject to the informational requirements of the
Exchange Act. As a result of the offering of our common stock, we will become
subject to the reporting requirements of the Exchange Act. We intend to furnish
our stockholders with annual reports containing consolidated financial
statements audited by independent certified public accountants.
65
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
CareInsite, Inc. (a Development Stage Company)
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets at June 30, 1997 and 1998 and March 31, 1999
(unaudited)............................................................ F-3
Consolidated Statements of Operations for the Period from Inception
(December 24, 1996) through June 30, 1997, the Year Ended June 30,
1998, the Nine Months Ended March 31, 1998 and 1999 (unaudited) and
Cumulative from Inception (December 24, 1996) through March 31, 1999
(unaudited)............................................................ F-5
Consolidated Statements of Changes in Stockholders' Equity for the
Period from Inception (December 24, 1996) through June 30, 1997, the
Year Ended June 30, 1998 and the Nine Months Ended March 31, 1999
(unaudited)............................................................ F-6
Consolidated Statements of Cash Flows for the Period from Inception
(December 24, 1996) through June 30, 1997, the Year Ended June 30,
1998, the Nine Months Ended March 31, 1998 and 1999 (unaudited) and
Cumulative from Inception (December 24, 1996) through March 31, 1999
(unaudited)............................................................ F-7
Notes to Consolidated Financial Statements.............................. F-8
Avicenna Systems Corporation (a Development Stage Company, acquired on
December 24, 1996)--Predecessor Business
Report of Independent Public Accountants................................ F-19
Statements of Operations for the Year Ended December 31, 1995, the
Period from January 1, 1996 through December 23, 1996 and Cumulative
from Inception (September 20, 1994) through December 23, 1996.......... F-20
Statements of Changes in Stockholder's Deficit for the Period from
Inception (September 20, 1994) through December 31, 1994, the Year
Ended December 31, 1995 and the Period from January 1, 1996 through
December 23, 1996...................................................... F-21
Statements of Cash Flows for the Year Ended December 31, 1995, the
Period from January 1, 1996 through December 23, 1996 and Cumulative
from Inception (September 20, 1994) through December 23, 1996.......... F-22
Notes to Financial Statements........................................... F-23
The Health Information Network Connection, LLC (a Development Stage
Company)--A company in which we own a minority equity interest
Independent Auditors' Report............................................ F-28
Balance Sheets at December 31, 1998 and March 31, 1999 (unaudited)...... F-29
Statements of Operations for the Year Ended December 31, 1998, the
Period from Inception (November 12, 1996) to December 31, 1998 and the
three months ended March 31, 1998 and 1999 (unaudited)................. F-30
Statements of Changes in Members' Deficit for the Period from Inception
(November 12, 1996) to December 31, 1997, the Year Ended December 31,
1998 and the three months ended March 31, 1999 (unaudited)............. F-31
Statements of Cash Flows for the Year Ended December 31, 1998, the
Period from Inception (November 12, 1996) to December 31, 1998 and the
three months ended March 31, 1998 and 1999 (unaudited)................. F-32
Notes to Financial Statements........................................... F-33
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
After CareInsite, Inc. amends its Certificate of Incorporation to
increase the number of authorized common shares to 300,000,000 and authorize
30,000,000 shares of preferred stock and effects a 50.0625-for-1 stock split,
we expect to be in a position to render the following audit report.
Arthur Andersen LLP
Roseland, New Jersey
March 17, 1999
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CareInsite, Inc.:
We have audited the accompanying consolidated balance sheets of
CareInsite, Inc. (a Delaware corporation in the development stage) and
subsidiary (formerly Synetic Healthcare Communications, Inc.) as of June 30,
1997 and 1998, and the related consolidated statements of operations, changes
in stockholder's equity and cash flows for the period from Inception (December
24, 1996) through June 30, 1997 and for the year ended June 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of CareInsite, Inc.
and subsidiary as of June 30, 1997 and 1998, and the results of their
operations and their cash flows for the period from Inception (December 24,
1996) through June 30, 1997 and for the year ended June 30, 1998 in conformity
with generally accepted accounting principles.
F-2
<PAGE>
CAREINSITE, INC.
(a Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<TABLE>
<CAPTION>
June 30,
--------------- March 31
1997 1998 1999
------ ------- -----------
(unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....................... $ 246 $ 315 $ 5,058
Note receivable................................. -- 2,000 --
Other current assets............................ 72 220 554
------ ------- -------
Total current assets.......................... 318 2,535 5,612
------ ------- -------
PROPERTY, PLANT AND EQUIPMENT:
Leasehold improvements.......................... 366 681 701
Machinery and equipment......................... 1,244 2,826 2,914
Furniture and fixtures.......................... 171 371 388
------ ------- -------
1,781 3,878 4,003
Less: Accumulated depreciation.................. (184) (1,025) (1,740)
------ ------- -------
Property, plant and equipment, net.............. 1,597 2,853 2,263
------ ------- -------
CAPITALIZED SOFTWARE
DEVELOPMENT COSTS............................... 348 4,972 31,330
OTHER ASSETS:
Intangible assets, net of accumulated
amortization of $405, $1,214 and $1,618 at June
30, 1997 and 1998 and March 31, 1999,
respectively................................... 1,213 404 --
Investments..................................... -- -- 4,668
Other........................................... -- 69 62
------ ------- -------
Total other assets............................ 1,213 473 4,730
------ ------- -------
$3,476 $10,833 $43,935
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
CAREINSITE, INC.
(a Development Stage Company)
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
June 30,
------------------ March 31,
1997 1998 1999
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
CURRENT LIABILITIES
Accounts payable............................. $ 265 $ 594 $ 247
Accrued liabilities.......................... 1,645 1,166 1,023
-------- -------- --------
Total current liabilities.................. 1,910 1,760 1,270
-------- -------- --------
DEFERRED INCOME TAXES.......................... -- 1,275 1,415
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 30,000,000
shares authorized; none-issued and
outstanding................................. -- -- --
Common stock, $.01 par value; authorized
300,000,000 shares; 50,062,500 shares issued
and outstanding at June 30, 1997 and 1998,
and 62,500,000 shares issued and outstanding
at March 31, 1999........................... 501 501 625
Paid-in capital.............................. 53,422 69,989 108,798
Stock subscription receivable................ (10,000) (10,000) --
Deficit accumulated during the development
stage....................................... (42,357) (52,692) (68,173)
-------- -------- --------
Total stockholders' equity................... 1,566 7,798 41,250
-------- -------- --------
$ 3,476 $ 10,833 $ 43,935
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
CAREINSITE, INC.
(a Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Period From Cumulative
Inception From Inception
(Dec 24, 1996) Nine Months (Dec 24, 1996)
Through June Year Ended Ended March 31, Through
30, June 30, ----------------- March 31,
1997 1998 1998 1999 1999
-------------- ---------- ------- -------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Service revenue (related
party)................. $ -- $ -- $ -- $ 213 $ 213
Cost and expenses:
Cost of services
(related party)...... -- -- -- 213 213
Research and
development.......... 7,652 4,762 3,976 8,720 21,134
Sales and marketing... 1,150 1,733 1,232 1,427 4,310
General and
administrative....... 1,379 3,887 2,589 2,944 8,210
Litigation costs...... -- -- -- 2,500 2,500
Other income, net..... (9) (47) (7) (110) (166)
Acquired in-process
research and
development.......... 32,185 -- -- -- 32,185
-------- -------- ------- -------- --------
42,357 10,335 7,790 15,694 68,386
-------- -------- ------- -------- --------
Net loss................ $(42,357) $(10,335) $(7,790) $(15,481) $(68,173)
======== ======== ======= ======== ========
Net loss per share --
basic and diluted..... $ (0.85) $ (0.21) $ (0.16) $ (0.29) $ (1.33)
======== ======== ======= ======== ========
Weighted average
shares outstanding --
basic and diluted... 50,063 50,063 50,063 54,208 51,444
======== ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
CAREINSITE, INC.
(a Development Stage Company)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Stock
------------- Deficit
Number Stock Accumulated Total
of Paid-In Subscription During the Stockholders'
Shares Amount Capital Receivable Development Stage Equity
------ ------ -------- ------------ ----------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Capitalization at
Inception, December 24,
1996................... 50,063 $501 $ 9,499 $(10,000) $ -- $ --
Pushdown of Avicenna
acquisition............ -- -- 28,817 -- -- 28,817
Pushdown of CareAgents
acquisition............ -- -- 3,250 -- -- 3,250
Net loss................ -- -- -- -- (42,357) (42,357)
Capital contributions
from parent............ -- -- 11,856 -- -- 11,856
------ ---- -------- -------- -------- --------
Balance, June 30, 1997.. 50,063 501 53,422 (10,000) (42,357) 1,566
Net loss................ -- -- -- -- (10,335) (10,335)
Capital contributions
from parent............ -- -- 16,567 -- -- 16,567
------ ---- -------- -------- -------- --------
Balance, June 30, 1998.. 50,063 501 69,989 (10,000) (52,692) 7,798
Settlement of stock
subscription receivable
(unaudited)............ -- -- -- 10,000 -- 10,000
Equity issued to Cerner
(unaudited)............ 12,437 124 20,676 -- -- 20,800
Issuance of warrants to
THINC (unaudited)...... -- -- 1,700 -- -- 1,700
Net loss (unaudited).... -- -- -- -- (15,481) (15,481)
Capital contributions
from parent
(unaudited)............ -- -- 16,433 -- -- 16,433
------ ---- -------- -------- -------- --------
Balance, March 31, 1999
(unaudited)............ 62,500 $625 $108,798 $ -- $(68,173) $ 41,250
====== ==== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
CAREINSITE, INC.
(a Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Period From
Inception Nine Months Cumulative
(December 24, Year Ended From Inception
1996) Through Ended March 31, (December 24, 1996)
June 30, June 30, ----------------- Through March 31,
1997 1998 1998 1999 1999
------------- -------- ------- -------- -------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss.............. $(42,357) $(10,335) $(7,790) $(15,481) $(68,173)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Write-off of acquired
in-process purchased
research and
development costs.... 32,185 -- -- -- 32,185
Write-off of acquired
intellectual property
and software
technologies......... 5,228 -- -- -- 5,228
Depreciation and
amortization......... 589 1,650 1,086 1,119 3,358
Write-off of
capitalized software
costs................ -- -- -- 2,381 2,381
Other................. -- -- -- 212 212
Changes in operating
assets and
liabilities, net of
the effects of
acquisitions:
Other assets.......... 61 (217) (2,292) (187) (343)
Accounts payable...... (241) 329 (87) (347) (259)
Accrued liabilities... (476) (479) (911) (144) (1,099)
-------- -------- ------- -------- --------
Net cash used in
operating
activities.......... (5,011) (9,052) (9,994) (12,447) (26,510)
-------- -------- ------- -------- --------
Cash flows used in
investing activities:
Purchases of property,
plant & equipment.... (1,023) (2,097) (777) (124) (3,244)
Software development
costs................ (348) (4,624) (2,540) (7,769) (12,741)
Investment in
unconsolidated
affiliate............ -- -- -- (1,350) (1,350)
-------- -------- ------- -------- --------
Net cash used in
investing
activities.......... (1,371) (6,721) (3,317) (9,243) (17,335)
-------- -------- ------- -------- --------
Cash flows provided by
financing activities:
Proceeds from
subscription
receivable........... -- -- -- 10,000 10,000
Capital contribution
from parent.......... 6,628 15,842 13,309 16,433 38,903
-------- -------- ------- -------- --------
Net cash provided by
financing
activities.......... 6,628 15,842 13,309 26,433 48,903
-------- -------- ------- -------- --------
Net increase in cash
and cash equivalents.. 246 69 (2) 4,743 5,058
Cash and cash
equivalents, beginning
of period............. -- 246 246 315 --
-------- -------- ------- -------- --------
Cash and cash
equivalents, end of
period................ $ 246 $ 315 $ 244 $ 5,058 $ 5,058
======== ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
CAREINSITE, INC.
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Nature of Operations and Summary of Significant Accounting Policies:
The Company--
On December 24, 1996, Synetic, Inc. ("Synetic" or the "Parent") acquired
Avicenna Systems Corporation (a Development Stage Company -- "Avicenna" -- See
Note 2), a privately held company that marketed and built Intranets for managed
healthcare plans, integrated healthcare delivery systems and hospitals. The
acquisition of Avicenna marked the Inception of Synetic's healthcare electronic
commerce business. On January 23, 1997, Synetic acquired CareAgents, Inc.
("CareAgents" -- See Note 2), a privately held company engaged in developing
Internet-based clinical commerce applications. On November 24, 1998, Synetic
formed Synetic Healthcare Communications, Inc., which was subsequently renamed
CareInsite, Inc. (the "Company"). On January 2, 1999, Synetic contributed the
stock of CareAgents to Avicenna. Concurrently, Avicenna contributed the stock
of CareAgents and substantially all of Avicenna's other assets and liabilities
to the Company (the "Formation"). Synetic also agreed to contribute $10,000,000
in cash to the Company, which amount was subsequently funded. The Formation has
been accounted for using the carryover basis of accounting and the Company's
financial statements include the accounts and operations of Avicenna and
CareAgents for all periods presented from the date each entity was acquired.
Upon Formation, the Certificate of Incorporation provided for authorized
capital stock consisting of 10,000,000 shares of common stock, $.01 par value
and 1,000,000 shares were subsequently issued. The shares issued in connection
with the Formation reflect the 50.0625-for-1 stock split of the common stock to
be effected in the form of a stock dividend to be declared and paid prior to
the closing of the initial public offering ("IPO") of the Company's common
stock. All references in the financial statements to shares, share prices, per
share amounts and warrants have been adjusted retroactively for the 50.0625-
for-1 stock split.
The Company is in the development stage. The Company intends to provide a
broad range of healthcare electronic commerce services which will leverage
Internet technology to improve communication among physicians, payers,
suppliers and patients. The provision of products and services using Internet
technology in the healthcare electronic commerce industry is subject to risks,
including but not limited, to those associated with competition from existing
companies offering the same or similar services, uncertainty with respect to
market acceptance of its products and services, rapid technological change,
management of growth, availability of future capital and minimal previous
record of operations or earnings.
In October 1998, the Company entered into agreements in principle with
The Health Information Network Connection LLC ("THINC") and Cerner Corporation
("Cerner").
THINC--
In January 1999, the Company, THINC, and THINC founding members, Greater
New York Hospital Association, Empire Blue Cross and Blue Shield, Group Health
Incorporated ("GHI"), and HIP Health Plans entered into definitive agreements
and consummated a transaction for a broad strategic alliance. Under this
arrangement, among other things, the Company (i) acquired a 20% ownership
interest in THINC in exchange for $1,500,000 and a warrant to purchase an
aggregate of 4,059,118 shares of common stock of the Company, (ii) agreed to
extend up to $2,000,000 and $1,500,000 in senior loans to THINC, (iii) entered
into a Management Services Agreement with THINC pursuant to which the Company
will manage all operations of THINC, including, providing THINC with certain
content and messaging services, (iv) licensed to THINC content and messaging
services for use over the THINC network and (v) entered into Clinical
Transaction Agreements with each of Empire, GHI and HIP (the "THINC Payers") to
provide online prescription and
F-8
<PAGE>
CAREINSITE, INC.
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
laboratory transaction services. The Company's Clinical Transaction Agreement
with GHI specifies that it does not have the exclusive right to provide
prescription communication services to GHI unless either the Company enters
into an agreement with GHI's pharmacy benefit manager outlining a methodology
for the implementation of such services or GHI elects to proceed without such
an agreement. GHI's current pharmacy benefit manager is Merck-Medco, a company
with whom the Company is currently involved in litigation (See Note 8). To
date, the Company has not entered into any such agreement with Merck-Medco and
GHI has not made such election.
As part of this arrangement, THINC entered into Managed Care Transaction
Contracts with each of the THINC Payers whereby the THINC Payers agreed to use
the THINC network for their online medical claims submission, eligibility,
benefit plan detail, roster distribution, remittance advice distribution,
claims inquiry, referral/pre-certification and authorization, and encounter
submission transactions.
The warrant issued to THINC is exercisable 180 days following the
occurrence of an initial public offering ("IPO") of the Company's common stock
or, if an IPO has not occurred, at the end of term of the warrant. The exercise
price per share of the warrant is the lesser of (i) the price per share of
common stock issued in the IPO, if an IPO has occurred, and (ii) $4.00 per
share. The warrant expires on January 1, 2006, subject to certain exceptions.
The warrant and the shares of our common stock issuable upon the exercise of
the warrant are subject to certain restrictions on transfer. The estimated fair
value of the warrant at the date issued was approximately $1,700,000, as
determined using the Black-Scholes option pricing model. The Company will
account for its investment in THINC using the equity method of accounting.
Assuming CareInsites' investment in THINC had been consummated on July 1,
1997, net loss and net loss per share for the year ended June 30, 1998 and the
nine months ended March 31, 1999 would have been $(11,089,000) or $(0.22) per
share and $(15,962,000) or $(0.29) per share, respectively. This pro forma
information is not necessarily indicative of what would actually have occurred
if the investment had been made on July 1, 1997, nor is it intended to be a
projection of future results.
Cerner--
In January 1999, the Company also entered into definitive agreements and
consummated a transaction with Cerner for a broad strategic alliance. Cerner, a
publicly traded corporation, is a supplier of clinical and management
information systems for healthcare organizations. Under this arrangement, the
Company, among other things, obtained a perpetual software license to the
functionality embedded in Cerner's Health Network Architecture ("HNA")
including HNA Millennium Architecture in exchange for a 19.9% equity interest
in the Company (such equity interest is subject to certain restrictions on
transfer and other adjustments). In addition, the Company has issued to Cerner
a warrant to purchase up to 807,764 shares of common stock at $4.00 per share,
exercisable only in the event THINC exercises its warrant. Also, the Company
will issue to Cerner 2,503,125 additional shares of common stock on or after
February 15, 2001 at $.01 per share in the event the Company has achieved a
stated level of physician participation by 2001. The software acquired from
Cerner was valued at approximately $20,800,000 based on the value of the equity
consideration as determined using established valuation techniques. In
connection with our strategic relationship with Cerner, we sold Cerner the
economic rights to 2% of THINC. Additionally, Cerner has agreed to fund
$1,000,000 of the Company's $2,000,000 senior loan to THINC. Additionally, the
Company and Cerner entered into a Marketing Agreement that allows for the
marketing and distribution of the Company's services to the physicians and
providers associated with more than 1,000 healthcare organizations who
currently utilize Cerner's clinical and management information system. In
addition, Cerner committed to make available engineering and systems
F-9
<PAGE>
CAREINSITE, INC.
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
architecture personnel and expertise to accelerate the deployment of the
Company's services, as well as ongoing technical support and future
enhancements to HNA.
Principles of Consolidation--
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiary, CareAgents, after elimination
of all significant intercompany accounts and transactions.
Interim Financial Information--
Information for the nine months ended March 31, 1998 and 1999 is
unaudited and has been prepared on the same basis as the audited financial
statements and includes all adjustments, consisting only of normal recurring
adjustments that management considers necessary for a fair presentation of the
Company's operating results for such periods. Results for the nine months ended
March 31, 1999 are not necessarily indicative of results to be expected for the
full fiscal year 1999 or for any future period.
Fair Value of Financial Instruments--
The carrying amounts of cash and cash equivalents and note receivable
approximate fair value because of the short-term maturity of these instruments.
Cash and Cash Equivalents--
The Company considers all investment instruments with a maturity of three
months or less from the date of purchase to be the equivalent of cash for
purposes of balance sheet presentation and for the consolidated statements of
cash flows.
Property, Plant and Equipment--
Property, plant and equipment are stated at cost. For financial reporting
purposes, depreciation is provided principally on the straight-line method over
the estimated useful lives of the assets. Annual depreciation rates range from
20% to 33% for leasehold improvements and from 10% to 33% for machinery and
equipment and furniture and fixtures. Expenditures for maintenance, repair and
renewals of minor items are charged to operations as incurred. Major
betterments are capitalized.
Capitalized Software Development Costs--
The Company capitalizes costs incurred for the production of computer
software for use in the sale of its services. Costs capitalized include direct
labor and related overhead for software produced by the Company and the costs
of software licensed from third parties. All costs in the software development
process which are classified as research and development are expensed as
incurred until technological feasibility has been established. Once
technological feasibility has been established, such software development costs
are capitalized until the software is commercially available. Such costs are
recorded at the lower of unamortized cost or net realizable value. As of June
30, 1997, June 30, 1998 and March 31, 1999, capitalized internally generated
costs were $348,000, $4,368,000 and $4,353,000, respectively. As of June 30,
1998 and March 31, 1999, amounts capitalized costs for software components
licensed from vendors were $604,000 and
F-10
<PAGE>
CAREINSITE, INC.
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$26,977,000, respectively. There were no capitalized costs for software
components licensed from third party vendors as of June 30, 1997. Software
components licensed from vendors include amounts capitalized related to the
perpetual software licenses obtained from Cerner.
As a result of the Company entering into license agreements with Cerner
under which the Company obtained a perpetual license to Cerner's HNA
architecture, certain elements of previously capitalized software costs were
deemed duplicative and obsolete and had no alternative future use.
Consequently, $2,381,000 of capitalized software were written off in December,
1998 and included in selling, general and administrative expenses in the nine
month period.
For the period from inception (December 24, 1996) through June 30, 1997,
$5,228,000 of costs associated with the acquisitions of certain intellectual
property and software technologies was expensed as research and development as
technological feasibility had not been reached.
Long-Lived Assets--
In accordance with Statement of Financial Accounting Standard ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," the Company continually evaluates whether events and
circumstances have occurred that indicate the remaining estimated useful life
of long-lived assets requires revision or that all or a portion of the
remaining balance may not be recoverable. Management does not believe that any
such events or changes in circumstances have occurred.
Accrued Liabilities--
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30
-------------
1997 1998
------ ------
<S> <C> <C>
Accrued payroll and benefit costs........................... $ 233 $ 408
Accrued software costs...................................... -- 400
Accrued acquisition costs................................... 1,256 109
Accrued consulting.......................................... 25 154
Other....................................................... 131 95
------ ------
Total................................................... $1,645 $1,166
====== ======
</TABLE>
Revenue Recognition--
The Company recognizes revenues from the management services it provides
to THINC. Revenues are recognized as the services are performed.
Income Taxes--
The Company accounts for income taxes pursuant to SFAS 109, "Accounting
for Income Taxes", which uses the liability method to calculate deferred income
taxes.
F-11
<PAGE>
CAREINSITE, INC.
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company is included in the consolidated federal income tax return of
Synetic. The accompanying consolidated statements of operations reflect income
taxes as if the Company filed a separate tax return.
Net Loss Per Share--
Basic net loss per share and diluted net loss per share are presented in
conformity with SFAS No. 128, "Earnings per Share" and SEC Staff Accounting
Bulletin No. 98 ("SAB 98"). Under SFAS No. 128 and SAB 98, basic net loss per
share is computed by dividing net income by the weighted-average number of
common shares outstanding for the period. In accordance with SAB 98, the
Company has determined that there were no nominal issuances of the Company's
common stock prior to the proposed IPO. The calculation of diluted net loss per
share excludes shares of common stock issuable upon exercise of employee stock
options as the effect of such exercises would be anti-dilutive. Common shares
outstanding and per share amounts reflect the Formation and are considered
outstanding from inception.
Accounting for Stock-Based Compensation--
The Company accounts for its stock-based employee compensation agreements
in accordance with the provisions of Accounting Principles Board Opinion No.
25.
Use of Estimates--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Standards--
In June 1997, the Financial Accounting Standards Board, (FASB), issued
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The Company is required to adopt SFAS No. 131 for its year ending
June 30, 1999. SFAS No. 131 requires disclosure of certain information
regarding operating segments, products and services, geographic areas of
operation and major customers. Adoption of SFAS No. 131 is expected to have no
material impact on the Company's financial condition or results of operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company is required to adopt SFAS No.
133 for its year ending June 30, 2000. SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. Because the Company
currently holds no derivative financial instruments and does not currently
engage in hedging activities, adoption of SFAS No. 133 is expected to have no
material impact on the Company's financial condition or results of operations.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position, or "SOP," 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires
that entities capitalize certain costs related to internal-use software once
certain criteria have been met. The Company is required to implement SOP 98-1
for the year ending June 30, 2000. Adoption of SOP 98-1 is expected to have no
material impact on the Company's financial condition or results of operations.
F-12
<PAGE>
CAREINSITE, INC.
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position or "SOP" 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 requires that entities expense start-up costs as
incurred. The Company is required to implement SOP 98-5 for the year ending
June 30, 2000. Adoption of SOP 98-5 is expected to have no material impact on
the Company's financial condition or results of operations.
(2) Acquisitions:
Avicenna--
On December 24, 1996, Synetic acquired the outstanding equity and
indebtedness (including employee stock options) of Avicenna, a privately-held
company located in Cambridge, Massachusetts, for 428,643 shares of Synetic's
common stock and 161,015 shares of Synetic's common stock to be issued in
connection with the exercise of employee stock options. The acquisition was
accounted for using the purchase method with the purchase price being allocated
to assets acquired and liabilities assumed based on their fair values.
A summary of the purchase price allocation is as follows (in thousands):
<TABLE>
<S> <C>
Cash.............................................................. $ 42
Short-term investments............................................ 240
Other assets...................................................... 216
Property, plant and equipment..................................... 759
Purchased research and development................................ 28,600
Intangible assets................................................. 1,502
Goodwill.......................................................... 116
Accounts payable.................................................. (507)
Accrued liabilities............................................... (2,151)
-------
$28,817
=======
</TABLE>
The intangible assets of $1,502,000 represent the estimated fair market
value of Avicenna's existing technical staff. The amount allocated to technical
staff was determined using established valuation techniques, and were amortized
over a two-year period. The amount allocated to purchased research and
development of $28,600,000 was determined using established valuation
techniques. Remaining amounts have been allocated to goodwill and were
amortized over a two-year period.
CareAgents--
On January 23, 1997, Synetic acquired CareAgents for 106,029 shares of
Synetic's common stock. CareAgents was an early development stage company
focused on Internet-based clinical commerce applications. The acquisition was
accounted for using the purchase method with the purchase price being allocated
to the assets acquired, purchased research and development of $3,585,000 and
liabilities assumed of $335,000, based on their fair values. The amount
allocated to purchased research and development of $3,585,000 was determined
using established valuation techniques.
F-13
<PAGE>
CAREINSITE, INC.
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Acquired In-Process Research and Development--
In connection with the acquisitions of Avicenna and CareAgents, an
allocation of the purchase price was made to acquired in-process research and
development. The estimates of fair value for the purchased research and
development are primarily the responsibility of management. These amounts have
been expensed on the respective acquisition dates as the in-process research
and development had not reached technological feasibility and had no
alternative future use. A description of the acquired in-process research and
development and the estimates made are as follows:
Avicenna--
The amount allocated to acquired in-process research and development of
$28,600,000 was determined based on an income approach valuation methodology.
The valuation projected revenue and costs over a nine year period with
profitability commencing in three years and increasing steadily through year
nine. The assumptions on which the projections were based are subject to a high
degree of uncertainty. The more significant uncertainties were those regarding
the timing and extent of the estimated revenues associated with this technology
as well as the estimated costs to complete the development. A nine year
forecast of revenues and costs attributable to the acquired technology was
prepared. The nine year projection period was consistent with the expected
useful life of the Intranets under development. The resulting operating cash
flows were then reduced by working capital and capital expenditures and
discounted to present value based upon a discount rate of 30%.
Avicenna was in the early stages of its development and the systems under
development had not yet reached technological feasibility. There was no
alternative future use for the technology then developed.
Avicenna had incurred approximately $1,263,000 in research and
development costs to develop the technology to its then current status.
Significant costs remained to complete the technological capabilities of its
product line and then migrate those capabilities to a new business model
envisioned by Synetic.
CareAgents--
The entire purchase price of $3,585,000 was assigned to acquired in-
process purchased research and development. The purchase price allocation to
acquired in-progress research and development was determined based on an income
approach methodology. The assumptions on which the projections were based are
subject to a high degree of uncertainty. The more significant uncertainties
were those regarding the timing and extent of the estimated revenues associated
with this technology as well as the estimated costs to complete the
development, as the company was in its initial stages of development. A nine
year forecast of revenues and costs attributable to the acquired technology was
prepared. The nine year projection period was consistent with the expected
useful life of the Intranets under development. The resulting operations cash
flows were then reduced by working capital and capital expenditures and
discounted to present value based upon a discount rate of 50%.
CareAgents' technology was in the very early stages of development with
basic user requirements, a business plan, preliminary system architecture with
process flow diagrams and prototyping efforts comprising the work completed to
date. Substantial costs remained to mature the technology to the point of
technological feasibility and then complete for first product deployment. No
work had been completed on a detailed engineering design or on building or
testing any substantive code.
F-14
<PAGE>
CAREINSITE, INC.
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) Stockholders' Equity:
Included in capital contributions from parent for the period from
Inception (December 24, 1996) through June 30, 1997 is $5,228,000 of rights to
certain intellectual property and software technologies purchased by Synetic to
be utilized in the development of the Company's healthcare communications
business.
Included in capital contributions from parent for the year ended June 30,
1998 is an assignment by Synetic of rights to an 8% Senior Convertible Note for
$2,000,000 from a privately held company (See Note 7).
(4) Income Taxes:
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. At
June 30, 1998 and March 31, 1999, deferred tax liabilities of $1,275,000 and
$1,415,000, respectively, primarily relate to software development costs
capitalized for financial reporting purposes and expensed for tax purposes.
For the period from inception (December 24, 1996) through January 2,
1999, the tax benefits associated with net operating losses generated by the
Company were retained by Synetic. Accordingly, no tax benefit has been or will
be reflected in the accompanying financial statements for these net operating
losses.
(5) Stock Options:
The Company expects to adopt a stock option plan covering its employees,
officers and directors, and certain consultants, agents and key contractors.
The Company intends to grant stock options under this plan to certain
employees, officers and directors in connection with an IPO of the Company's
common stock. The Company intends to grant such stock options at fair market
value.
Historically, the employees of the Company have participated in the stock
option plans of Synetic. These plans provide for both non-qualified and
incentive stock options. Generally, options granted under these plans become
exercisable at a rate of 20% on each annual anniversary of the grant and expire
within ten to fifteen years from the date of the grant and have an exercise
price equal to 100% of the fair market value of Synetic's common stock on the
date of grant.
Synetic has elected to follow APB No. 25 in accounting for its employee
stock options. Accordingly, no compensation cost has been recognized for option
plans. Had the determination of compensation costs for employees of the Company
who participated in the stock option plans of Synetic been based on the fair
value at the grant dates for awards under these plans, consistent with the
method of SFAS No. 123, the Company's net loss would have been $(45,570,000)
and $(20,340,000) and basic and diluted loss per share would have been $(0.91)
and $(0.41) for the period from Inception (December 24, 1996) through June 30,
1997 and for the year ended June 30, 1998, respectively. At June 30, 1998, the
Company's employees had 4,173,444 and 717,739 of Synetic's stock options
outstanding and exercisable, respectively.
The pro forma results are not intended to be indicative of or a
projection of future results.
F-15
<PAGE>
CAREINSITE, INC.
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of each option grant is estimated on the date of grant by
using the Black-Scholes option-pricing model. The following weighted average
assumptions were used:
<TABLE>
<CAPTION>
1997 1998
----------- ----------
<S> <C> <C>
Expected dividend yield......................... 0% 0%
Expected volatility............................. .2722 .2986
Risk-free interest rates........................ 6.5% 6.3%
Expected option lives (years)................... .083 - 1.74 .50 - 2.00
Weighted average fair value of options granted
during the year................................ $ 10.11 $ 13.10
</TABLE>
(6) Related Party Transactions:
Tax Sharing Agreement--
Upon completion of the offering, the Company will cease to file a
consolidated federal income tax return with Synetic, but will continue to file
a combined tax return with Synetic for California income tax purposes. The
Company and Synetic will enter into a tax sharing agreement providing that, for
periods prior to the offering and during which the Company was included in
Synetic's consolidated federal income tax returns, the Company will be required
to pay Synetic an amount equal to our federal income tax liabilities for these
periods, determined as if the Company had filed federal income tax returns on a
separate company basis. Additionally, for periods both before and after the
offering, in situations where the Company files a combined return with Synetic
for state income tax purposes, such as for California, the Company will be
required to pay Synetic an amount equal to the Company's state income tax
liabilities, determined as if the Company had filed state income tax returns on
a separate company basis. If the Company experiences a net operating loss
resulting in no federal or state income tax liability for a taxable period in
which it was included in Synetic's consolidated federal or combined state
income tax returns, the Company will be entitled to a payment from Synetic
equal to the reduction, if any, in the federal or state income tax liability of
the Synetic consolidated group by reason of the use of the Company's net
operating loss. Further, under the tax sharing agreement, if the Company
receives a net tax benefit for certain equity based compensation arrangements
involving Synetic stock, or for the payment by Synetic of certain litigation
expenses and damages pursuant to the terms of an indemnification agreement
between the Company and Synetic as described below, then the Company is
required to pay an amount equal to those tax benefits to Synetic when they are
actually realized by the Company. The tax sharing agreement also will provide
for Synetic to conduct tax audits and tax controversies on the Company's behalf
for periods, and with respect to returns, in which the Company is included in
the Synetic consolidated or combined returns.
Services Agreement--
The Company and Synetic have entered into a services agreement dated as
of January 1, 1999, pursuant to which Synetic will provide the Company with
certain administrative services which may include payroll, accounting, business
development, legal, tax, executive services and information processing and
other similar services. The Company will pay the actual costs of providing
these services. Such costs will include an allocable portion of the
compensation and other related expenses of employees of Synetic who serve as
officers of the Company. This agreement will be terminable by either party upon
60 days prior written notice in certain events, or by Synetic, at any time, if
Synetic ceases to own at least 50% of the voting stock of the Company. The
services agreement shall terminate by its terms, if not previously terminated
or renewed, on January 1, 2004.
F-16
<PAGE>
CAREINSITE, INC.
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Allocations from Synetic to the Company were $230,000, $836,000, $562,000
and $747,000 for the period from Inception (December 24, 1996) through June 30,
1997, for the fiscal year ended June 30, 1998 and for the nine months ended
March 31, 1998 and 1999, respectively. The allocation was calculated based on
the estimated time the Synetic employees worked providing services to the
Company.
Indemnification Agreement--
The Company and Synetic will enter into an indemnification agreement,
under the terms of which the Company will indemnify and hold harmless Synetic,
on an after tax basis, with respect to any and all claims, losses, damages,
liabilities, costs and expenses that arise from or are based on the operations
of the business of the Company before or after the date of the consummation of
the offering. Similarly, Synetic will indemnify and hold harmless the Company,
on an after tax basis, with respect to any and all claims, losses, damages,
liabilities, costs and expenses that arise from or are based on the operations
of Synetic other than the business of the Company before or after the date of
the consummation of the offering. With respect to the Merck litigation, this
agreement provides that Synetic will bear both the actual costs of conducting
the litigation and any monetary damages that may be awarded to Merck and Merck-
Medco in the litigation. The agreement further provides that any damages
awarded to the Company and Synetic in the litigation will be for the account of
Synetic. Finally, the agreement provides that Synetic shall not be responsible
for any losses suffered by CareInsite resulting from any equitable relief
obtained by Merck-Medco against CareInsite, including, but not limited to, any
lost profits, other losses, damages, liabilities, or costs or expenses arising
from such equitable relief.
(7) Note Receivable:
On March 24, 1998 Synetic loaned a privately held company ("Debtor")
$2,000,000 under an 8% Senior Convertible Note due March 23, 1999 (the "Note").
In connection with the formation of the Company, Synetic assigned its rights
under the Note to the Company. In January, 1999, Debtor was acquired by another
privately held company ("Successor"). In connection with this acquisition, the
Company elected to convert the Note into 291,952 shares of Successor's Series B
Preferred Stock ("Preferred"). The Preferred is convertible into common stock
(i) at the Company's option any time after the anniversary date of issuance,
and (ii) automatically immediately prior to an IPO of Successor. In 1999, the
Successor filed a registration statement for an IPO. The Preferred is included
in investments on the March 31, 1999 consolidated balance sheet.
(8) Commitments and Contingencies:
Legal Proceedings--
On February 18, 1999, Merck & Co., Inc. and Merck-Medco Managed Care,
L.L.C. filed a complaint in the Superior Court of New Jersey against the
Company, Synetic, Martin J. Wygod, Chairman of the Company and Synetic, and
three officers and/or directors of the Company and Synetic, Paul C. Suthern,
Roger C. Holstein and Charles A. Mele. The plaintiffs assert that the Company,
Synetic and the individual defendants are in violation of certain non-
competition, non-solicitation and other agreements with Merck and Merck-Medco,
and seek to enjoin the Company and them from conducting the Company's
healthcare e-commerce business and from soliciting Merck-Medco's customers. The
Synetic and Wygod agreements provide an expiration date of May 24, 1999. Mr.
Suthern's, Mr. Mele's and Mr. Holstein's agreements expire in December 1999,
March 2000 and September 2002, respectively.
F-17
<PAGE>
CAREINSITE, INC.
(a Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A hearing was held on March 22, 1999 on an application for preliminary
injunction filed by Merck and Merck-Medco. On April 15, 1999, the Superior
Court denied this application. The Company believes that Merck's and Merck-
Medco's positions in relation to it and the individual defendants are without
merit and the Company intends to vigorously defend the litigation. However, the
outcome of complex litigation is uncertain and cannot be predicted at this
time. Any unanticipated adverse result could have a material adverse effect on
the Company's financial condition and results of operations.
The Company has recorded $2,500,000 in litigation costs associated with
the Merck and Merck-Medco litigation for the nine months ended March 31, 1999.
Leases--
The Company leases office space and equipment under various
noncancellable operating leases. Rental expense was $270,000 and $1,241,000 for
the period from Inception (December 24, 1996) through June 30, 1997 and for the
fiscal year ended June 30, 1998, respectively. The minimum aggregate rental
commitments under noncancellable leases, excluding renewal options, are as
follows (in thousands):
<TABLE>
<CAPTION>
Years ending June 30,
---------------------
<S> <C>
1999.............................................................. $1,270
2000.............................................................. 1,229
2001.............................................................. 1,207
2002.............................................................. 805
Thereafter........................................................ --
</TABLE>
F-18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Avicenna Systems Corporation:
We have audited the accompanying statements of operations, changes in
redeemable convertible preferred stock and stockholder's deficit and cash flows
of Avicenna Systems Corporation (a Massachusetts corporation in the development
stage) for the year ended December 31, 1995, for the period from January 1,
1996 through December 23, 1996 and for the period from inception (September 20,
1994) through December 23, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Avicenna Systems Corporation for the year ended December 31, 1995, for the
period from January 1, 1996 through December 23, 1996 and for the period from
inception (September 20, 1994) through December 23, 1996 in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Roseland, New Jersey
February 22, 1999
F-19
<PAGE>
AVICENNA SYSTEMS CORPORATION
(a Development Stage Company)
(Predecessor Business)
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Cumulative from
Period from Inception
January 1, (September 20,
Year Ended 1996 Through 1994) Through
December 31, December 23, December 23,
1995 1996 1996
------------ ------------ ---------------
<S> <C> <C> <C>
Revenue............................. $ -- $ 20 $ 20
----- ------- -------
Operating expenses
Research and development.......... 86 1,161 1,263
Sales and marketing............... 12 1,297 1,318
General and administrative........ 69 860 936
----- ------- -------
Total operating expenses............ 167 3,318 3,517
----- ------- -------
Net loss............................ $(167) $(3,298) $(3,497)
===== ======= =======
Preferred stock dividends........... -- (241) (241)
----- ------- -------
Net loss applicable to common
stockholder........................ $(167) $(3,539) $(3,738)
===== ======= =======
Net loss per share applicable to
common stockholder --basic and
diluted............................ $(.44) $ (9.34) $ (9.86)
===== ======= =======
Weighted average common shares
outstanding -- basic and diluted... 379 379 379
===== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-20
<PAGE>
AVICENNA SYSTEMS CORPORATION
(a Development Stage Company)
(Predecessor Business)
STATEMENTS OF CHANGES IN REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDER'S DEFICIT
(in thousands)
<TABLE>
<CAPTION>
Redeemable Convertible
Preferred Stock Stockholder's Deficit
------------------------ -----------------------------------------
Deficit
Common Accumulated
Stock Additional During the Total
Number of Carrying Number Carrying Paid-In Development Stockholder's
Shares Value of Shares Value Capital Stage Deficit
----------- ----------- --------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization,
September 20, 1994..... -- $ -- 379 $ 4 $-- $ (4) $ --
Net loss................ -- -- -- -- -- (32) (32)
---------- ----------- --- --- --- ------- -------
Balance, December 31,
1994................... -- -- 379 4 -- (36) (32)
Sales of Series A
redeemable convertible
preferred stock, net of
issuance costs......... 450 1,350 -- -- -- (38) (38)
Capital contributed in
connection with
repayment of
stockholder loans...... -- -- -- -- 32 -- 32
Net loss................ -- -- -- -- -- (167) (167)
---------- ----------- --- --- --- ------- -------
Balance, December 31,
1995................... 450 1,350 379 4 32 (241) (205)
Sales of Series A
redeemable convertible
preferred stock........ 583 1,750 -- -- -- -- --
Preferred stock
dividends.............. -- 241 -- -- -- (241) (241)
Net loss................ -- -- -- -- -- (3,298) (3,298)
---------- ----------- --- --- --- ------- -------
Balance, December 23,
1996................... 1,033 $ 3,341 379 $ 4 $32 $(3,780) $(3,744)
========== =========== === === === ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE>
AVICENNA SYSTEMS CORPORATION
(a Development Stage Company)
(Predecessor Business)
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Cumulative From
Period From Inception
January 1, 1996 (September 20, 1994)
Year Ended Through Through
December 31, 1995 December 23, 1996 December 23, 1996
----------------- ----------------- --------------------
<S> <C> <C> <C>
Cash flows from
operating activities:
Net loss............. $ (167) $(3,298) $(3,497)
Adjustments to
reconcile net loss
to net cash used in
operating
activities:
Depreciation........ 2 136 138
Changes in current
assets and
liabilities
Accounts payable.... -- 496 507
Accrued expenses.... 45 35 80
Accounts
receivable......... -- (84) (84)
Customer deposits... -- 79 79
Other............... (8) (21) (29)
------ ------- -------
Net cash used in
operating
activities........ (128) (2,657) (2,806)
------ ------- -------
Cash flows used in
investing activities:
Purchase of property
and equipment....... (136) (760) (896)
Increase in other
assets.............. (11) (99) (110)
------ ------- -------
Net cash used in
investing
activities......... (147) (859) (1,006)
------ ------- -------
Cash flows from financ-
ing activities:
Proceeds from
stockholder loans... 111 -- 132
Payments of
stockholder loans... (100) -- (100)
Proceeds from
issuance of 7%
demand note......... -- 1,000 1,000
Proceeds from sale of
redeemable
convertible
preferred stock,
net................. 1,312 1,750 3,062
------ ------- -------
Net cash provided by
financing
activities......... 1,323 2,750 4,094
------ ------- -------
Net increase/(decrease)
in cash and cash
equivalents........... 1,048 (766) 282
Cash and cash
equivalents, beginning
of period............. -- 1,048 --
------ ------- -------
Cash and cash
equivalents, end of
period................ $1,048 $ 282 $ 282
------ ------- -------
Supplemental Disclosure
of Noncash Investing
and Financing
Activities:
Contribution of loan
payable to
stockholder to
capital............. $ 32 $ -- $ 32
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-22
<PAGE>
AVICENNA SYSTEMS CORPORATION
(a Development Stage Company)
(Predecessor Business)
NOTES TO FINANCIAL STATEMENTS
(1) Nature of Operations and Summary of Significant Accounting Policies:
The Company--
Avicenna Systems Corporation (the "Company") was incorporated on
September 20, 1994 to develop Internet technology based systems for healthcare
organizations. Prior to December 15, 1995, the Company operated as an S
Corporation for federal and state income tax purposes. On December 24, 1996,
all of the outstanding equity and indebtedness (including employee stock
options) of the Company were acquired by Synetic, Inc.
The Company is in the development stage and is devoting substantially all
of its efforts toward product research and development. The Company is subject
to a number of risks similar to those of other development companies,
including the development of commercially viable products, competition from
substitute products and larger companies, and the ability to obtain adequate
additional financing necessary to fund product development.
The accompanying financial statements reflect the application of certain
accounting practices as described in this note and elsewhere in the notes to
the financial statements. Financial statements prepared in conformity with
generally accepted accounting principles require the use of estimates. Actual
results could vary from estimates.
Reclassifications--
Certain reclassifications have been made to prior year amounts to conform
to current year presentation.
Depreciation--
The Company provides for depreciation by charges to operations in amounts
that allocate the cost of property and equipment on a straight-line basis over
their estimated useful lives of 3 years for computers and equipment and 5
years for furniture and fixtures.
Loan Payable to Stockholder--
Through December 31, 1994, a stockholder of the Company advanced the
Company approximately $21,000 for operating expenses incurred in 1994. During
1995, this stockholder advanced the Company an additional amount of
approximately $111,000. These advances were non-interest-bearing. Upon the
closing of the sale of the Series A redeemable convertible preferred stock,
$100,000 of these advances was repaid, and the remaining balance of
approximately $32,000 was contributed to capital.
Research and Development--
The Company has evaluated the establishment of technological feasibility
of its products in accordance with Statement of Financial Accounting Standards
("SFAS") No. 86, Accounting for the Costs of Computer Software To Be Sold,
Leased or Otherwise Marketed. All costs in the software development process
which are classified as research and development are expensed as incurred
until technological possibility has been established. The Company defines the
technological feasibility as the completion of a working model. The time
F-23
<PAGE>
AVICENNA SYSTEMS CORPORATION
(a Development Stage Company)
(Predecessor Business)
NOTES TO FINANCIAL STATEMENTS--(Continued)
period during which costs could be capitalized from the point of researching
technological feasibility until the time of general product release is very
short, and consequently, the amounts that could be capitalized are not material
to the Company's financial position or results of operations. Therefore, the
Company has charged all such costs to research and development in the period
incurred.
Net Loss Per Share--
Basic and diluted net loss per share is based on the average number of
shares outstanding during the year. Diluted loss per share is the same as basic
as the inclusion of common stock equivalents would be antidilutive.
Accounting for Stock-Based Compensation--
The Company accounts for its stock-based employee compensation agreements
in accordance with the provisions of Accounting Principles Board Opinion No.
25.
(2) Income Taxes:
The Company provides for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under the liability method specified by SFAS No.
109, a deferred tax asset or liability is determined based on the difference
between the financial statement and the tax bases of assets and liabilities, as
measured by the enacted tax rates assumed to be in effect when those
differences reverse.
Prior to December 15, 1995 the Company elected to be taxed as an S
Corporation for federal and state income tax purposes.
As of December 23, 1996 the Company had a net operating loss carryforward
of approximately $1.2 million. A full valuation allowance has been recorded
against the Company's deferred tax asset as of December 23, 1996, as the
ultimate realization of this asset is not assured.
(3) Convertible Demand Notes:
In October 1996, the Company entered into an agreement with the majority
of the holders of the Series A Preferred Stock (the Purchasers) to sell to the
Purchasers, on a pro rata basis and from time to time over a period of six
months, up to $3,000,000 of the Company's Convertible Demand Notes (the Demand
Notes). The interest rate for each of these notes is 7%. In conjunction with
the issuance of each note, the Company has agreed to issue to each of the
Purchasers a warrant to purchase additional Equity Securities. The aggregate
exercise price of the warrant is equal to 25% of the principal amount of each
note sold to the Purchasers. As of December 23, 1996, the Company has issued a
total of $1,000,000 of Demand Notes with accompanying warrants. The warrants
expire at the earliest to occur of (i) either the sale of the Company, (ii) the
effective date of an initial public offering of any stock or security of the
Company, or (iii) the third anniversary of the closing date of the Additional
Sale.
(4) Redeemable Convertible Preferred Stock:
The Company has 1,066,667 authorized shares of preferred stock, all of
which have been designated as Series A Redeemable Convertible Preferred Stock
(Series A Preferred Stock). The Company has reserved
F-24
<PAGE>
AVICENNA SYSTEMS CORPORATION
(a Development Stage Company)
(Predecessor Business)
NOTES TO FINANCIAL STATEMENTS--(Continued)
1,066,667 shares of common stock related to the conversion of Series A
Preferred Stock. On December 15, 1995 the Company sold 450,000 shares of Series
A Preferred Stock for $3.00 per share. The issuance resulted in gross proceeds
to the Company of $1,350,000. The holders of the Series A Preferred Stock were
also given the right to purchase up to an additional 583,333 shares of Series A
Preferred Stock. In February 1996, the Company issued an additional 15,000
shares of Series A Preferred Stock at $3.00 per share, and in June 1996 the
Company issued an additional 568,334 shares of Series A Preferred Stock at
$3.00 per share. These issuances resulted in gross proceeds to the Company of
approximately $1,750,000. The rights, preferences and privileges of the holders
of the Series A Preferred Stock are as follows:
Dividends--
Each holder of Series A Preferred Stock is entitled to receive, when and
if declared by the Board of Directors, quarterly dividends at the annual rate
of $0.24 per share. These dividends, whether or not earned or declared, are
cumulative. At December 23, 1996, total dividends in arrears were $240,900.
Conversion--
Each share of Series A Preferred Stock is convertible at any time into
common stock at the exchange rate in effect at the time of the conversion,
currently a one-to-one exchange rate, and is subject to appropriate
adjustments, as defined. In addition, any accumulated dividends are convertible
into common stock at the then current conversion rate. Conversion is automatic
upon the closing of a public stock offering of common stock in which the
aggregate proceeds to the Company are at least $10,000,000 and the price per
share is at least $15.00.
Voting--
Each holder of Series A Preferred Stock is entitled to the number of
votes equal to the number of shares of common stock into which such preferred
stock is then currently convertible.
Liquidation--
In the event of liquidation, the holders of the Series A Preferred Stock
are entitled to receive a liquidation preference equal to $3.00 per share plus
any amount of declared but unpaid dividends, including the cumulative
dividends. Any remaining assets will be distributed on a pro rata basis among
the holders of common stock, as defined.
Redemption--
The Company is required to offer to redeem, on a pro rata basis, the
shares of Series A Preferred Stock at the rate of 25% per annum beginning
December 31, 2000 and on each succeeding anniversary date until all shares are
redeemed, at the rate of $3.00 per share plus all declared but unpaid
dividends, excluding the cumulative dividends. The redemption requirement is
waived if less than 60% of the holders of Series A Preferred Stock accept the
offer. If the Company has insufficient funds to redeem the shares at the
redemption date, then the Company is required to use available funds at the end
of each succeeding quarter or quarters to meet redemption requirements.
F-25
<PAGE>
AVICENNA SYSTEMS CORPORATION
(a Development Stage Company)
(Predecessor Business)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(5) Stockholder's Deficit:
Restricted Stock Agreement--
The Company's founder and sole common stockholder and the holders of the
Series A Preferred Stock have entered into a restricted stock agreement whereby
the Company has the right to repurchase all of the founder's common stock
unless certain length of employment conditions are met. The restriction
provides that as of December 31, 1995, 25% of the shares have become
unrestricted under the agreement. The lapsing of the restriction of an
additional 25% occurred in June 1996, at the time of the second closing of the
Series A Preferred Stock. The lapsing of the restriction will continue under
the agreement at the rate of 3.125% per quarter for the next 16 quarters
following December 31, 1995, unless employment is terminated for any reason.
The lapsing of the restriction will accelerate by 75% of unrestricted shares in
the event of a sale or merger of the Company involving a change of more than
50% of the Company's voting stock or a sale of substantially all of the
Company's assets.
(6) Stock Options:
In 1995, the Company adopted the 1995 Stock Option Plan (the 1995 Plan).
Under the 1995 Plan, stock options, consisting of either incentive stock
options or non qualified stock options, may be granted to directors, officers,
employees and consultants of the Company to purchase shares of the Company's
common stock at no less than the fair market value of the Company's common
stock at the grant date. Options become exercisable at the rate of 25% per year
on the anniversary date of the grant and generally expire 10 years from the
date the option is granted. In the event of (i) a sale or merger of the Company
involving a change of more than 50% of the voting stock, (ii) a sale of
substantially all of the Company's assets, or (iii) a liquidation of the
Company, as defined, unvested options shall be subject to accelerated vesting.
Upon the occurrence of such an event, 75% of all unvested options shall
immediately vest, provided that the Series A Preferred Stockholders receive a
certain minimum rate of return on their investment, as defined. As of December
23, 1996, the Company had reserved 716,800 shares of common stock for issuance
under its 1995 Plan. A summary of activity under the 1995 Plan is as follows:
<TABLE>
<CAPTION>
Number of Exercise Price
Shares Per Share
--------- --------------
<S> <C> <C>
Balance, December 31, 1994........................ -- $ --
Granted......................................... 106,176 0.30
------- -----
Balance, December 31, 1995........................ 106,176 $0.30
Granted......................................... 566,396 0.30
------- -----
Balance, December 23, 1996........................ 672,572 $0.30
------- -----
Exercisable, December 23, 1996.................... 50,244 $0.30
------- -----
</TABLE>
The Company has elected to follow APB No. 25 in accounting for its
employee stock options. Accordingly, no compensation cost has been recognized
for its stock option plan. Had compensation costs been based on the fair value
method of SFAS No. 123, the Company's net loss would have been $(181,000) for
the year ended December 31, 1995 and $(3,580,000) for the period from January
1, 1996 through December 23, 1996 and basic and diluted net loss applicable to
common stockholder would have been $(.48) for the year ended December 31, 1995
and $(9.45) for the period from January 1, 1996 through December 23, 1996.
F-26
<PAGE>
AVICENNA SYSTEMS CORPORATION
(a Development Stage Company)
(Predecessor Business)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The pro forma results indicated above are not intended to be indicative
of or a projection of future results.
The fair value of each option grant is estimated on the date of grant by
using the Black-Scholes Option Pricing model using the following weighted
average assumptions: risk free interest rate of 6.5% and an expected option
life (in years) of 5 years.
(7) Commitments:
The Company began conducting its operations in leased facilities in 1996.
The operating lease on this facility expires in January 1999. However, in
October 1996, the Company entered into an operating lease for additional office
space, and sublet its original leased facility in its entirety at full cost.
The new lease expires in July 2001. The future minimum rental payments are
approximately as follows:
<TABLE>
<CAPTION>
Gross Net
Minimum Sublease Minimum
Rental Income Rental
---------- -------- --------
<S> <C> <C> <C>
1997.......................................... $ 66,000 $ 50,000 $ 16,000
1998.......................................... 251,000 54,000 197,000
1999.......................................... 201,000 4,000 197,000
2000.......................................... 197,000 -- 197,000
2001.......................................... 197,000 -- 197,000
Thereafter.................................... 115,000 -- 115,000
---------- -------- --------
$1,027,000 $108,000 $919,000
========== ======== ========
</TABLE>
F-27
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Health Information Network Connection, LLC:
We have audited the accompanying balance sheet of The Health Information
Network Connection, LLC (the Company) (a development stage company) as of
December 31, 1998, and the related statements of operations, members' deficits
and cash flows for the year then ended and for the period from November 12,
1996 (inception) to December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Health
Information Network Connection, LLC as of December 31, 1998 and the results of
its operations and its cash flows for the year then ended and for the period
November 12, 1996 to December 31, 1998 in conformity with generally accepted
accounting principles.
KPMG LLP
Melville, New York
February 26, 1999
F-28
<PAGE>
THE HEALTH INFORMATION NETWORK
CONNECTION, LLC
(a Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
December March 31,
31, 1998 1999
----------- -----------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.......................... $ 5,122 $ 570,546
Due from Empire Blue Cross and Blue Shield......... 60,000 --
Due from employees................................. 7,764 10,438
Other assets....................................... 1,581 34,000
----------- -----------
Total current assets............................. 74,467 614,984
Property and equipment, net.......................... 2,769,822 2,516,476
Restricted cash...................................... 420,000 420,000
Organization costs, net of accumulated amortization
of $43,187 at
December 31, 1998................................... 64,902 --
Security deposits.................................... 103,455 103,555
Warrants in CareInsite, Inc. ........................ -- 1,726,845
----------- -----------
Total assets..................................... $ 3,432,646 $ 5,381,860
=========== ===========
Liabilities and Members' Deficit
Current liabilities:
Accounts payable................................... $ 1,439,029 $ 802,563
Accrued expenses................................... 267,993 288,827
Current installments of obligations under capital
leases............................................ 722,406 738,233
Notes payable to members........................... 1,200,000 1,036,324
Current portion of note payable to BRC............. 41,747 83,335
Amount due to BRC.................................. 50,000 50,000
Deferred revenue................................... 846,750 1,665,130
----------- -----------
Total current liabilities........................ 4,567,925 4,664,412
Obligations under capital leases, net of current
portion............................................. 1,657,869 1,467,265
Note payable to BRC, net of current portion.......... 458,253 416,665
Due to member -- HIP................................. 443,100 446,250
----------- -----------
Total liabilities................................ 7,127,147 6,994,592
----------- -----------
Commitments and contingencies
Members' deficit:
Members' capital contributed......................... 4,346,201 7,573,046
Deficit accumulated during the development stage..... (7,790,702) (9,035,778)
----------- -----------
(3,444,501) (1,462,732)
Less subscription receivables...................... (250,000) (150,000)
----------- -----------
Total members' deficit........................... (3,694,501) (1,612,732)
----------- -----------
Total liabilities and members' deficit........... $ 3,432,646 $ 5,381,860
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE>
THE HEALTH INFORMATION NETWORK
CONNECTION, LLC
(a Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative
period from
inception
Year Ended (November 12,
December 1996) to Three months ended
31, December 31, March 31,
----------- ------------- ------------------------
1998 1998 1998 1999
----------- ------------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
Consulting revenues from
related party.......... $ -- $ 25,000 $ -- $ --
Interest income......... 23,055 46,700 7,251 4,389
Other income............ 6,535 6,535 6,622 18
----------- ----------- ----------- -----------
Total revenues........ 29,590 78,235 13,873 4,407
Expenses:
Salaries and employee
benefits............... 1,607,739 2,162,247 202,372 271,060
Technical costs -- BRC.. 427,184 1,122,831 327,233 --
Management fee --
CareInsite............ -- -- -- 213,000
Professional fees....... 302,041 470,911 44,599 89,694
Sales and marketing..... 166,901 307,802 44,314 22,894
Software maintenance
fees................... 135,996 396,167 80,145 54,007
General and
administrative......... 835,612 1,317,552 160,030 175,588
Interest................ 374,067 588,927 77,002 77,981
Depreciation and
amortization........... 1,016,887 1,502,500 187,578 280,357
----------- ----------- ----------- -----------
Total expenses........ 4,866,427 7,868,937 1,123,273 1,184,581
----------- ----------- ----------- -----------
Net loss before
cumulative effect of
change in accounting
principle............ (4,836,837) (7,790,702) (1,109,400) (1,180,174)
Cumulative effect of
change in accounting
for organization
costs.................. -- -- -- (64,902)
----------- ----------- ----------- -----------
Net loss.............. $(4,836,837) $(7,790,702) $(1,109,400) $(1,245,076)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE>
THE HEALTH INFORMATION NETWORK
CONNECTION, LLC
(a Development Stage Company)
STATEMENTS OF MEMBERS' DEFICIT
<TABLE>
<CAPTION>
Deficit
Accumulated
Members' Less During
Capital Subscription Development
Contributed Receivables Stage Total
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
Balance at inception
(November 12, 1996)........ $ -- $ -- $ -- $ --
Initial capital
subscriptions due from
members.................... 3,750,000 (3,750,000) -- --
Payment on subscriptions.... -- 400,000 -- 400,000
Net loss for the period from
inception to December 31,
1996....................... -- -- (54,762) (54,762)
---------- ----------- ----------- -----------
Balance at December 31,
1996....................... 3,750,000 (3,350,000) (54,762) 345,238
Payment on subscriptions.... -- 2,100,000 -- 2,100,000
Capital contribution from
GNYHA...................... 91,201 -- -- 91,201
Net loss.................... -- -- (2,899,103) (2,899,103)
---------- ----------- ----------- -----------
Balance at December 31,
1997....................... 3,841,201 (1,250,000) (2,953,865) (362,664)
Payment on subscriptions.... -- 1,000,000 -- 1,000,000
Repurchase of BRC's
membership interest........ (500,000) -- -- (500,000)
Capital contribution from
members.................... 1,005,000 -- -- 1,005,000
Net loss.................... -- -- (4,836,837) (4,836,837)
---------- ----------- ----------- -----------
Balance at December 31,
1998....................... 4,346,201 (250,000) (7,790,702) (3,694,501)
Payment on subscription
(unaudited)................ -- 100,000 -- 100,000
Capital contributions of
cash and warrants in
CareInsite, Inc.
(unaudited)................ 3,226,845 -- -- 3,226,845
Net loss (unaudited)........ -- -- (1,245,076) (1,245,076)
---------- ----------- ----------- -----------
Balance at March 31, 1999
(unaudited)................ $7,573,046 $ (150,000) $(9,035,778) $(1,612,732)
========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-31
<PAGE>
THE HEALTH INFORMATION NETWORK
CONNECTION, LLC
(a Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
period from
inception
(November 12, Three months ended
Year ended 1996) to March 31,
December 31, December 31, ------------------------
1998 1998 1998 1999
------------ ------------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss................. $(4,836,837) $(7,790,702) $(1,109,400) $(1,245,076)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization............ 1,016,887 1,502,500 187,578 280,357
Cumulative effect of
change in accounting
principle............... -- -- -- 64,902
Change in assets and
liabilities:
Due from BCBS........... (60,000) (60,000) -- 60,000
Due from employees...... 578 (7,764) 6,404 (2,774)
Other assets............ 31,375 (105,036) 15,057 (32,419)
Due to member--BRC...... (479,933) 50,000 -- --
Accounts payable and
accrued expenses....... 1,364,137 1,707,022 (156,797) (615,631)
Deferred revenue........ 636,750 846,750 -- 818,380
----------- ----------- ----------- -----------
Net cash used in
operating activities.. (2,327,043) (3,857,230) (1,057,158) (672,261)
----------- ----------- ----------- -----------
Cash flows from investing
activities:
Purchase of equipment.... (864,563) (1,011,009) (111,280) (27,012)
Organizational costs..... -- (108,089) -- --
Sale of short-term
investment.............. 20,716 -- -- --
----------- ----------- ----------- -----------
Net cash used in
investing activities.. (843,847) (1,119,098) (111,280) (27,012)
----------- ----------- ----------- -----------
Cash flows from financing
activities:
Principal payments on
capital lease
obligations............. (531,250) (837,851) (110,248) (174,777)
Advance from member--
HIP..................... 12,600 443,100 -- 3,150
Decrease (increase) in
restricted cash......... 3,994 (420,000) 3,944 --
Capital contributions and
cash received from
payment of
subscriptions........... 2,005,000 4,596,201 950,000 1,600,000
Proceeds from (repayment
of) notes payable....... 1,200,000 1,200,000 -- (163,676)
----------- ----------- ----------- -----------
Net cash provided by
financing activities.. 2,690,344 4,981,450 843,696 1,264,697
----------- ----------- ----------- -----------
(Decrease) increase in
cash and cash
equivalents.............. (480,546) 5,122 (324,742) 565,424
Cash and cash equivalents
at beginning of period... 485,668 -- 485,668 5,122
----------- ----------- ----------- -----------
Cash and cash equivalents
at end of period......... $ 5,122 $ 5,122 $ 160,926 $ 570,546
=========== =========== =========== ===========
Supplemental disclosures
of cash flow information:
Capital lease obligations
incurred for the
purchase of equipment... $ 807,611 $ 3,018,126 $ 631,674 $ --
=========== =========== =========== ===========
Cash paid during period
for interest............ $ 329,115 $ 541,475 $ 77,002 $ 70,308
=========== =========== =========== ===========
Repurchase of membership
interest in exchange for
note payable............ $ 500,000 $ 500,000 $ -- $ --
=========== =========== =========== ===========
Capital contribution in
form of warrants in
CareInsite.............. $ -- $ -- $ -- $ 1,726,845
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE>
THE HEALTH INFORMATION NETWORK
CONNECTION, LLC
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies and Practices:
(a) Description of Business and Basis of Presentation
The Health Information Network Connection, LLC ("THINC" or the "Company")
was established as a New York Limited Liability Company (LLC) on November 12,
1996. THINC was organized for the development of a community health information
network (CHIN) for the metropolitan New York, New Jersey and Connecticut
region. THINC plans to provide software and technical support which will
facilitate the exchange of healthcare information in the metropolitan New York
area, allowing providers and payers to access their patients' clinical and
insurance-related information through their desktop computers. It will allow
hospitals, continuing care facilities, physicians, laboratories, and third
party payers to exchange business and patient care data through a private
electronic "intranet" system.
THINC is a joint venture originally owned by the following institutions:
Greater New York Hospital Association (GNYHA), Group Health Incorporated (GHI),
Health Insurance Plan of Greater New York (HIP), Empire Blue Cross and Blue
Shield (BCBS), and BRC Health Care of Dallas, Texas (BRC) (until June 22,
1998). THINC had entered into a service agreement with BRC to provide technical
personnel. On June 22, 1998, THINC and BRC agreed to terminate this agreement
and THINC repurchased BRC's membership interest (note 2). As a limited
liability corporation, the liability of each member is limited to the amount of
each members' capital contribution.
As of December 31, 1998, THINC has entered into software license and
network services agreements with the following institutions: Beth Israel
Medical Center, New York University Medical Center, New York Downtown Hospital,
Hospital for Joint Diseases Orthopedic Institute, and Lenox Hill Hospital.
During 1998, the Company received $636,750 from Beth Israel Medical Center
pursuant to a software license and network services agreement. During 1997, the
Company received $210,000 from the other institutions pursuant to the terms of
the applicable agreements. Such amounts have been reflected as deferred revenue
in the accompanying balance sheet. Such amounts will be recorded as revenue
upon acceptance of the health care information systems by the institutions.
The efforts of THINC during 1996 were devoted to financing organizational
costs and developing a business and marketing plan. The focus of its efforts
during 1997 and 1998 have shifted to establishing technical operations and
building a client base. Since no revenue has been generated from THINC's
planned principal operations, the accompanying financial statements are
presented under the guidelines stipulated by the Financial Accounting Standards
Board, Statement of Financial Accounting Standards (SFAS) No. 7, "Accounting
and Reporting by Development Stage Enterprises."
The Company has suffered operating losses since inception and the
Company's current liabilities exceeded total current assets by $4,493,458 at
December 31, 1998. Management believes that as a result of its agreement with
CareInsite, Inc. (note 9), the Company will have adequate working capital to
continue its operations through at least January 1, 2000.
(b) Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reports amounts of assets and liabilities
F-33
<PAGE>
THE HEALTH INFORMATION NETWORK
CONNECTION, LLC
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
(c) Cash Equivalents
THINC considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
Cash equivalents of $420,000 at December 31, 1998 consist of certificates
of deposit with an initial term of less than three months and is included in
restricted cash in the accompanying balance sheet.
(d) Property and Equipment
Property and equipment, including purchased software costs, are stated at
cost. Plant and equipment under capital leases are stated at the present value
of minimum lease payments.
Depreciation of plant and equipment is calculated on the straight-line
method over the estimated useful lives of the assets. Plant and equipment held
under capital leases and leasehold improvements are amortized straight line
over the shorter of the lease term or the estimated useful life of the asset.
THINC periodically reviews its long-lived assets to assess recoverability and
to ensure the carrying values of such long-lived assets have not been impaired.
All costs in the software development process which includes
customization of the purchased networking software from HNV (note 2) are
expensed as incurred until technological feasibility of the software product
has been established. The Company defines technological feasibility as the
completion of a working model. Through December 31, 1998, the Company has not
completed or fully installed a working model and, accordingly, all development
costs have been expensed and all funds received from the health care
institutions to date have been deferred.
(e) Organization Costs
Organizational costs consist of legal and other professional fees
incurred to establish THINC as a New York limited liability company and are
being amortized over five years on a straight line basis.
In April 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
(SOP 98-5). SOP 98-5 requires that costs incurred during start-up activities,
including organization costs, be expensed as incurred. This statement is
effective for annual financial statements issued for fiscal years beginning
after December 15, 1998. The implementation of SOP 98-5 resulted in the write-
off of the unamortized balance of capitalized organizational costs, amounting
to $64,902, as of January 1, 1999.
(f) Income Taxes
THINC has elected to be treated as a partnership for income tax purposes
and as such the tax liability on all income earned or the tax benefit of
operating losses accrue to the members as owners of THINC.
F-34
<PAGE>
THE HEALTH INFORMATION NETWORK
CONNECTION, LLC
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(g) Revenue Recognition
The Company recognizes revenue in accordance with Statement of Position
97-2, Software Revenue Recognition. Accordingly, revenue from the license of
software will be recognized when the software is delivered, installed and
accepted by the customer, the fee is fixed and determinable and collection of
the resulting receivable is deemed probable. Software maintenance and network
access fees will be deferred and recognized as revenue ratably over the term of
the applicable contract. Service revenue and training fees are recognized when
the services and training, respectively, are performed. Deferred revenue
represents payments received upon signing of the software license and network
services agreements but for which the software has not yet been accepted by the
customer. Such amounts are subject to refund if the product is not ultimately
accepted by the customer.
(h) Fair Value of Financial Instruments
The fair value of the Company's capital lease obligations and note
payable to BRC are estimated using discounted cash flow analyses, based upon
the Company's estimated current incremental borrowing rate for similar types of
securities. For all other financial instruments, the carrying value
approximates fair value due to the short maturity applicable to such
instruments.
(i) Interim Financial Information (Unaudited)
The financial statements as of March 31, 1999 and for the three-month
periods ended March 31, 1998 and 1999 are unaudited and include all adjustments
(consisting only of normal recurring adjustments) which management considers
necessary for a fair statement of the financial position at such date and the
operating results and cash flows for the periods. Results for interim periods
are not necessarily indicative of results for the entire year or any future
periods.
(2) Members Equity Contributions:
On November 19, 1996, GNYHA, GHI, HIP, BCBS and BRC each signed a
subscription agreement with THINC to acquire 10 units of THINC at a purchase
price of $75,000 per unit. The total purchase price of $750,000 for the 10
units was to be paid by each of the companies in accordance with their
respective payment schedule included in the subscription agreement.
During 1998, GNYHA, HIP, BCBS and BRC made payments of $250,000 each
relating to their units subscriptions. In 1998, the Company and BRC agreed to
terminate BRC's investment and involvement with THINC. As a result of the
termination of the agreement with BRC, THINC signed a note payable to BRC in
the amount of $500,000 in exchange for BRC's equity interest. In addition,
THINC will make a payment to BRC of $125,000 not less than ten days prior to
the time that THINC shall make any distribution or pay any dividend with
respect to any membership units or any other equity interests issued by THINC
or repurchase any membership units or other equity interest issued by THINC. If
such payment is made in the future, it will be reflected as a reduction of
additional paid-in capital.
During 1998, the Board of Directors approved an additional $320,000
capital contribution from each member. During 1998, GNYHA, GHI, HIP and BCBS
made payments of $45,000, $320,000, $320,000 and $320,000, respectively,
relating to the additional capital contribution. As of December 31, 1998, the
Company
F-35
<PAGE>
THE HEALTH INFORMATION NETWORK
CONNECTION, LLC
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
had a subscription receivable from GNYHA in the amount of $250,000. GNYHA also
owes $275,000 in connection with the additional capital contribution approved
in 1998.
In connection with the investment by CareInsite as discussed in note 9,
the THINC operating agreement was amended. The agreement provides for among
other things that GNYHA will receive credits against future capital
contributions to the extent THINC meets certain projections as to hospital
revenue. In addition, the operating agreement was amended to eliminate units of
interest and to state members' interest as a percentage of ownership. The
description of the members' capital contribution in the balance sheets and
statements of members' deficit have been revised to reflect this change.
(3) Software Agreement:
THINC entered into a five-year software license agreement with Health
Network Ventures, Inc. (HNV) on November 29, 1996 to license the HNVnet
software and use such software to create and maintain an on-line healthcare
information exchange network in the THINC market region. The date of acceptance
(as defined in the software license agreement) did not occur until March 1997.
An initial fee of $200,000 was paid on November 29, 1996 and an additional
$1,330,000 was paid upon acceptance in 1997. The cost of the software is being
amortized over the life of the agreement. THINC also contracted for a five-year
maintenance contract for a fee of $680,000, the first installment of $170,000
due on December 1, 1997, with subsequent installments of $170,000 each due on
the anniversary date thereof. In addition to the fees stated above, THINC will
pay HNV a specified fee per user based upon the terms as set forth in the
software license agreement. The Company also paid $87,115 to HNV for a
processing interface in 1997 and 1998, which has been recorded as purchased
software costs.
(4) Property and Equipment:
Property and equipment at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Estimated
Useful Lives
------------
<S> <C> <C>
Office equipment................................. 3 years $ 196,573
Computer equipment............................... 3 years 2,365,085
Purchased software--HNV.......................... 5 years 1,617,115
Leasehold improvements........................... 3 years 50,361
----------
4,229,134
Less accumulated depreciation and amortization... (1,459,312)
----------
$2,769,822
==========
</TABLE>
Depreciation and amortization expense in 1998 was approximately $998,000.
The unamortized cost of purchased software from HNV at December 31, 1998 was
approximately $943,000.
F-36
<PAGE>
THE HEALTH INFORMATION NETWORK
CONNECTION, LLC
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(5) Note Payable to Members:
GHI, BCBS and HIP loaned the Company $1,200,000 in the form of notes
payable with original maturity dates of October 31, 1998 ($600,000) and January
30, 1999 ($600,000). Interest accrues at a rate of 8 1/2% per annum. At
December 31, 1998, no repayments have been made.
(6) Long-Term Debt:
Long-term debt at December 31, 1998 consists of the following:
<TABLE>
<S> <C>
Notes payable(a)............................................... $ 500,000
Capital lease obligations(b)................................... 2,380,275
----------
2,880,275
Less current installments...................................... 764,153
----------
$2,116,122
==========
</TABLE>
(a) On June 1, 1998, THINC issued a $500,000 note payable to BRC for
the repurchase of 10 membership units, which represents repayment
of its original investment in THINC. Principal payments and accrued
interest are to be paid in 36 equal monthly installments of
$17,005, with the first such installment being due on July 1, 1999
and additional installments being due and payable on the first of
each month through June 1, 2002. Interest accrues at a rate of 8
1/2% per annum. Principal payments on the note payable to BRC for
the next four years are as follows: $41,747 in 1999; $171,592 in
2000; $186,867 in 2001; and $99,764 in 2002. The carrying value of
the note payable approximates fair value at December 31, 1998.
(b) THINC entered into four capital lease agreements during 1998 and
1997 to finance the licensing of software packages and the purchase
of computer equipment. The leases are for 36 months (three leases)
and 60 months (one lease). The repayment of one lease with a
balance of $1,483,820 at December 31, 1998 is guaranteed by the
members of THINC.
The effective interest rates on the above leases range from 6.4% to
12.6%. The estimated fair value of the Company's capital lease obligations was
approximately $2,150,000 at December 31, 1998.
At December 31, 1998, the gross amount of property, plant and equipment
and related accumulated depreciation recorded under capital leases were as
follows:
<TABLE>
<S> <C>
Computer equipment............................................. $1,602,140
Purchased software............................................. 1,530,000
Office equipment............................................... 85,000
----------
3,217,140
Less accumulated amortization.................................. (567,124)
----------
$2,650,016
==========
</TABLE>
F-37
<PAGE>
THE HEALTH INFORMATION NETWORK
CONNECTION, LLC
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Future obligations under capital leases are as follows:
<TABLE>
<CAPTION>
Year ending Capital lease
December 31, obligations
------------ -------------
<S> <C>
1999....................................................... $ 905,628
2000....................................................... 905,628
2001....................................................... 627,912
2002....................................................... 306,282
----------
2,745,450
Less amount representing interest under capital lease
obligations............................................... (365,175)
----------
$2,380,275
==========
</TABLE>
(7) Related Party Transactions:
At December 31, 1998, THINC owed BRC $50,000 as the result of a
processing interface project performed by BRC and THINC on behalf of HIP in
1997. The total fee for the project was $75,000, the revenue from which was
distributed 67% and 33% to BRC and THINC, respectively.
BRC provided THINC with technology services and had entered into an
eighteen month information technology service agreement with the Company dated
February 6, 1997, which was terminated June 22, 1998 (note 1(a)).
During 1998, the Company provided technical services to BCBS to develop a
processor interface for which it billed BCBS $60,000 which was received in
January 1999. This amount was offset by a charge for the same amount from HNV
which provided the services under the contract with THINC.
At December 31, 1998, THINC owes $443,100 to HIP. These funds were
advanced by HIP to allow THINC to secure a letter of credit that enabled the
Company to enter into certain capital lease transactions during 1997 (note 6).
Such funds are reflected as restricted cash in the amount of $420,000 in the
accompanying balance sheet as of December 31, 1998.
(8) Commitments:
At December 31, 1998, THINC is obligated through the year 2000 under
several noncancellable operating lease agreements for office space and office
equipment. Rent expense in 1998 was approximately $328,000. The following is a
schedule of future minimum lease payments:
<TABLE>
<S> <C>
1999.............................................................. $335,388
2000.............................................................. $150,507
</TABLE>
(9) Subsequent Event and Contingency:
In January 1999, Synetic Healthcare Communications, Inc, which was
subsequently renamed CareInsite, Inc., (CareInsite), THINC, and the THINC
founding members, entered into definitive agreements and consummated a
transaction for a broad strategic alliance. Under this arrangement, among other
things,
F-38
<PAGE>
THE HEALTH INFORMATION NETWORK
CONNECTION, LLC
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
CareInsite (i) acquired a 20% ownership interest in THINC in exchange for $1.5
million in cash and a warrant to purchase 81,081 shares of CareInsite common
stock (subject to adjustment for certain events including the proposed stock
split), (ii) agreed to provide senior working capital loans to THINC of up to
$2.0 million and $1.5 million, (iii) entered into a Management Services
Agreement with THINC pursuant to which the Company will manage all operations
of THINC, including providing THINC with certain content and messaging
services, (iv) licensed to THINC content and messaging services for use over
the THINC network and (v) entered into Clinical Transaction Agreements with
each of Empire, GHI and HIP (the "THINC Payers") to provide online prescription
and laboratory transaction services, subject to certain limitations. The
working capital loans have due dates of July 1, 2001 for a $2.0 million working
capital loan and July 1, 2002 for a $1.5 million working capital loan. Both
working capital loans are contingent on the continuation of the Management
Services Agreement.
As part of this arrangement, THINC entered into Managed Care Transaction
Contracts with each of the THINC Payers whereby the THINC Payers agreed to use
the THINC network for their online medical claims submission, eligibility,
benefit plan detail, roster distribution, remittance advice distribution,
claims inquiry, referral/pre-certification and authorization, and encounter
submission transactions.
The warrant issued to THINC is exercisable 180 days following the
occurrence of an initial public offering (IPO) of CareInsite's common stock or,
if an IPO has not occurred, at the end of the term of the warrant. The exercise
price of the warrant is the lesser of (i) the IPO price, if an IPO has
occurred, and (ii) $200 per share (subject to adjustment for the proposed stock
split). The warrant expires on January 1, 2006, subject to certain exceptions.
The warrant and the shares of CareInsite's common stock issuable upon the
exercise of the warrant are subject to certain restrictions on transfer.
On February 18, 1999, Merck & Co., Inc. and Merck-Medco Managed Care,
L.L.C. filed a complaint in the Superior Court of New Jersey against CareInsite
and certain of its officers and directors. Plaintiffs assert that CareInsite
and the individual defendants are in violation of certain non-competition, non-
solicitation and other agreements with Merck and Merck-Medco, and seek to
enjoin CareInsite and them from conducting CareInsite's healthcare e-commerce
business and from soliciting Merck-Medco's customers. If CareInsite is
unsuccessful in defending this litigation, the ability of CareInsite to provide
services to THINC under the Management Services Agreement between CareInsite
and THINC may be adversely impacted. Such a result could have a material
adverse effect on THINC.
F-39
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5,650,000 Shares
CareInsite, Inc.
Common Stock
----------------
PROSPECTUS
----------------
Merrill Lynch & Co.
Warburg Dillon Read LLC
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC registration fee............................................. $28,901
NASD filing fee.................................................. 10,896
Nasdaq listing fee............................................... 1,000
Blue Sky fees and expenses....................................... 10,000
Printing and engraving expenses.................................. 100,000
Attorneys' fees and expenses..................................... *
Accountants' fees and expenses................................... *
Transfer agent's and registrar's fees and expenses............... *
Miscellaneous.................................................... *
-------
Total........................................................ *
=======
</TABLE>
- -------
*To be supplied by amendment
The amounts set forth above are estimates except for the SEC registration
fee and the NASD filing fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides, in summary,
that directors and officers of Delaware corporations are entitled, under
certain circumstances, to be indemnified against all expenses and liabilities
(including attorney's fees) incurred by them as a result of suits brought
against them in their capacity as a director or officer, if they acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interests of the Company, and, with respect to any criminal action or
proceeding, if they had no reasonable cause to believe their conduct was
unlawful; provided that no indemnification may be made against expenses in
respect of any claim, issue or matter as to which they shall have been adjudged
to be liable to the Company, unless and only to the extent that the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, they are fairly and reasonably entitled to indemnity for such
expenses which the court shall deem proper. Any such indemnification may be
made by the Company only as authorized in each specific case upon a
determination by the shareholders or disinterested directors that
indemnification is proper because the indemnities has met the applicable
standard of conduct.
Article Six of the registrant's Certificate of Incorporation provides that
no director of the registrant shall be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability: (i) for any breach of the director's duty of loyalty to
the Company or its stockholders; (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law; (iii) in
respect of certain unlawful dividend payments or stock redemptions or
purchases; or (iv) for any transaction from which the director derived an
improper personal benefit.
The Company's Certificate of Incorporation and By-Laws provide for
indemnification of its directors and officers to the fullest extent permitted
by Delaware law, as the same may be amended from time to time.
In addition, the Company maintains liability insurance for its directors
and officers.
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<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following information reflects sales by the registrant of
unregistered securities within the past three years. The issuance by the
registrant of the securities sold in the transactions referenced below were not
registered under the Securities Act of 1933, as amended pursuant to Section
4(2) thereof, as such transactions did not involve a public offering.
In January 1999, the registrant issued to The Health Information Network
Connection LLC (i) a warrant (the "THINC Warrant") exercisable for 4,059,118
shares (after giving effect to the registrant's proposed 50.0625-for-1 stock
split) of the registrant's common stock (subject to adjustment), representing
approximately 6% of the registrant's common stock outstanding after giving
effect to the exercise of the THINC Warrant and (ii) $1.5 million in cash, in
exchange for a 20% ownership interest in THINC.
In January 1999, the registrant issued to Cerner Corporation (i)
12,437,500 shares (after giving effect to the registrant's proposed 50.0625-
for-1 stock split) of its common stock, representing 19.9% of its common stock
outstanding after such issuance, and (ii) a warrant exercisable for a number of
shares of common stock of the registrant equal to 19.9% of the shares issuable
upon exercise of the THINC Warrant, each in consideration for Cerner
Corporation entering into non-competition, marketing, license and master
servicing and outsourcing agreements with the registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Amended and Restated Certificate of Incorporation of the Registrant.*
3.2 By-laws of the Registrant.*
4.1 Specimen Certificate representing Common Stock.*
5.1 Opinion of Shearman & Sterling as to the legality of the Common
Stock.**
10.1 Agreement and Plan of Merger among Synetic, Inc., Synternet
Acquisition Corp., a subsidiary of Synetic, Inc., Avicenna Systems
Corp., and the individuals and entities listed on the signature pages
thereof, dated as of December 23, 1996.**
10.2 Agreement and Plan of Merger among Synetic, Inc., Synternet
Acquisition Corp., CareAgents Inc. and the individuals listed on the
signature pages thereof, dated as of January 23, 1997.**
10.3 Subscription Agreement dated as of January 2, 1999 between Synetic
Healthcare Communications, Inc. (since renamed CareInsite, Inc.
("CareInsite")), Synetic, Inc., Avicenna Systems Corporation and
Cerner Corporation.**
10.4 License Agreement dated as of January 2, 1999 between CareInsite and
Cerner Corporation.**
10.5 Stockholders' Agreement, dated as of January 2, 1999, among
CareInsite, Synetic, Inc., Avicenna Systems Corporation and Cerner
Corporation.**
10.6 Non-Competition Agreement, dated as of January 2, 1999, among
CareInsite, Synetic, Inc., Avicenna Systems Corporation and Cerner
Corporation.**
10.7 Marketing Agreement, dated as of January 2, 1999, between CareInsite
and Cerner Corporation.**
10.8 Clinical Transaction Agreement, dated as of January 1, 1999, between
CareInsite and Empire Blue Cross and Blue Shield, Empire Healthchoice,
Inc., Empire Healthchoice Assurance Inc. and Empire Health Plans
Assurance, Inc.+**
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
10.9 Clinical Transaction Agreement, dated as of January 1, 1999, between
CareInsite and Group Health Incorporated.+**
10.10 Clinical Transaction Agreement, dated as of January 1, 1999, between
CareInsite and Health Insurance Plans of Greater New York.+**
10.11 Management Services Agreement, effective as of January 1, 1999,
between CareInsite and The Health Information Network Connection LLC
("THINC").**
10.12 Warrant dated as of January 1, 1999 (entitling THINC to purchase from
CareInsite 81,081 shares of common stock).**
10.13 Amended and Restated Operating Agreement, dated as of January 1, 1999,
among The Health Information Network Connection LLC, Empire Blue Cross
and Blue Shield, GNYHA Management Corporation, GroupHealth
Incorporated, Health Insurance Plan of Greater New York and
CareInsite.**
10.14 Form of Tax-Sharing Agreement between the Registrant and Synetic,
Inc.*
10.15 Services Agreement, dated January 1, 1999, between the Registrant and
Synetic, Inc.**
10.16 Form of Indemnification Agreement between the Registrant and Synetic,
Inc.*
10.17 CareInsite, Inc. Employee Stock Option Plan.*
10.18 CareInsite, Inc. Officer Stock Option Plan.*
10.19 Employment Agreement dated as of January 23, 1997 between Synetic,
Inc. and David M. Margulies.**
10.20 Employment Agreement dated as of November 3, 1997 between Avicenna
Systems Corp. and Paul M. Bernard.**
10.21 Employment Agreement dated November 6, 1997 between Synetic, Inc. and
Roger C. Holstein.**
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Shearman & Sterling (included in its opinion in Exhibit
5.1).**
23.3 Consent of Kegler, Brown, Hill & Ritter Co., L.P.A.**
23.4 Consent of KPMG LLP.
24.1 Powers of Attorney (included on the signature page of this
Registration Statement).
27.1 Financial Data Schedule for fiscal year ended June 30, 1998 (for SEC
use only).**
27.2 Financial Data Schedule for six months ended December 31, 1998 (for
SEC use only).**
27.3 Financial Data Schedule for nine months ended March 31, 1999 (for SEC
use only).**
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
+ Exhibits for which Registrant is seeking confidential treatment for certain
portions. Confidential material has been redacted and has been separately
filed with the Securities and Exchange Commission.
(b) Financial Statement Schedules.
The schedules have been omitted because of the absence of circumstances
under which they would be required.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall
be deemed to be part of this registration statement as of the time it
was declared effective.
(2) For the purposes of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
The undersigned registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has duly caused this Amendment to the Registration
Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the Borough of Elmwood Park in the State of New Jersey on
May 17, 1999.
Careinsite, Inc.
/s/ Paul C. Suthern
By: _________________________________
Name: Paul C. Suthern
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed by the following
persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Paul C. Suthern Director and Principal May 17, 1999
______________________________________ Executive Officer
Paul C. Suthern
/s/ Paul M. Bernard Principal Financial and May 17, 1999
______________________________________ Accounting Officer
Paul M. Bernard
* Director May 17, 1999
______________________________________
Roger C. Holstein
* Director May 17, 1999
______________________________________
James R. Love
* Director May 17, 1999
______________________________________
David M. Margulies
* Director May 17, 1999
______________________________________
Charles A. Mele
* Director May 17, 1999
______________________________________
Martin J. Wygod
* /s/ David C. Amburgey As Attorney-in-Fact May 17, 1999
______________________________________
David C. Amburgey
</TABLE>
II-5
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated March 17, 1999 related to the consolidated financial statements of
CareInsite, Inc. and our report dated February 22, 1999 related to the
financial statements of Avicenna Systems Corporation included in or made part
of this registration statement and to all references to our Firm included in
this registration statement.
/s/ Arthur Andersen LLP
_____________________________________
Roseland, New Jersey
May 14, 1999
