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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-27501
THE TRIZETTO GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0761159
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
567 SAN NICOLAS DRIVE, SUITE 360
NEWPORT BEACH, CALIFORNIA 92660
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 719-2200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.001
PAR VALUE, AND SERIES A JUNIOR PARTICIPATING PREFERRED STOCK, $0.001 PAR VALUE
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934,
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 28, 2001, 36,771,893 shares of common stock were outstanding and
the aggregate market value of such common stock held by non-affiliates (based
upon the closing price as reported by the Nasdaq National Market) was
approximately $267 million.
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FORM 10-K
For the Fiscal Year Ended December 31, 2000
PAGE
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PART I
Item 1 Business.................................................... 1
Item 2 Properties.................................................. 18
Item 3 Legal Proceedings........................................... 18
Item 4 Submission of Matters to a Vote of Security Holders......... 18
PART II
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 19
Item 6 Selected Financial Data..................................... 21
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 22
Item 7A Quantitative and Qualitative Disclosures About Market
Risk........................................................ 29
Item 8 Financial Statements and Supplementary Data................. 29
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 30
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 30
Item 11 Executive Compensation...................................... 35
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 39
Item 13 Certain Relationships and Related Transactions.............. 40
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 42
SIGNATURES........................................................... 46
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PART I
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT HAVE BEEN MADE
PURSUANT TO THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. THESE STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL
PERFORMANCE. IN SOME CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY
TERMINOLOGY SUCH AS "MAY", "WILL", "SHOULD", "FORECASTS", "EXPECTS", "PLANS",
"ANTICIPATES", "BELIEVES", "ESTIMATES", "PREDICTS", "POTENTIAL", OR "CONTINUE'
OR THE NEGATIVE OF SUCH TERMS AND OTHER COMPARABLE TERMINOLOGY. THESE STATEMENTS
ARE ONLY PREDICTIONS. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN
EVALUATING THESE STATEMENTS, YOU SHOULD SPECIFICALLY CONSIDER VARIOUS FACTORS,
INCLUDING THE RISKS OUTLINED BELOW UNDER THE CAPTION "RISK FACTORS." THESE
FACTORS MAY CAUSE OUR ACTUAL EVENTS TO DIFFER MATERIALLY FROM ANY
FORWARD-LOOKING STATEMENT. WE DO NOT UNDERTAKE TO UPDATE ANY FORWARD-LOOKING
STATEMENT.
ITEM 1 -- BUSINESS
COMPANY OVERVIEW
We provide industry-leading information technology solutions and services
to the healthcare industry, including remotely hosted applications,
client/server software systems, an Internet platform, and consulting and
business outsourcing services. Our customers include managed care organizations,
preferred provider organizations, third party administrators, provider groups
and physician practice management companies. As of December 31, 2000, we served
approximately 600 customers representing more than 90 million health plan
members, approximately 40% of the insured population in the United States.
We offer three sets of complementary products and services: ASP solutions,
HealtheWare(TM) and HealthWeb(R). ASP solutions offer pre-integrated, remotely
hosted third-party and proprietary applications and related services to
healthcare payer organizations, benefits administrators and providers on a
monthly subscription fee basis. As part of our ASP solutions, we also offer
outsourcing of business processes and consulting services, including information
technology assessment and software development and implementation. HealtheWare
offers premium software applications to the payer and benefits administration
markets on either a hosted or a licensed basis. HealthWeb is our Internet
platform, which facilitates information exchange and commerce over the Internet
between health plans and providers, employers and health plan members. Our three
sets of products and services allow us to offer comprehensive, integrated
solutions to our customers while providing the opportunity to cross-sell our
services and diversify our sources of revenue.
OUR SOLUTIONS
Our comprehensive suite of information technology solutions and services
provides our customers with the following key benefits:
- RAPID DEPLOYMENT AND FLEXIBILITY. Our ASP solutions offer hosted
software applications that are typically already installed in our
customer connectivity centers, allowing rapid deployment to our
customers. In addition, ASP customers pay only for the services they
need and can change these services as required. In contrast, most
traditional in-house software implementations are more time-consuming
and the cost structure is less flexible.
- LOWER AND MORE PREDICTABLE COSTS. Our ASP customers pay a predictable
monthly subscription fee to gain access to software applications we host
over a secure network. We estimate that our ASP customers can save
approximately 30% or more over the term of their contract with us,
compared with the cost of implementing and maintaining applications
in-house.
- ACCESS TO THE BEST HEALTHCARE APPLICATIONS. Through our relationships
with third-party software providers and through our proprietary Erisco
and RIMS software, our ASP customers have access to the most
sophisticated healthcare applications. Our Erisco and
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RIMS applications offer essential administrative software for healthcare
payers and benefits administrators. These brands are widely recognized
in their respective markets for providing advanced, highly functional
and scalable solutions that create operational efficiencies and reduce
costs. Erisco and RIMS can be licensed for a client/server system or
they can be purchased on an ASP basis.
- PRESERVATION OF INVESTMENT IN EXISTING SYSTEMS. Our ASP solutions and
HealthWeb Internet platform allow our customers to continue using their
existing systems rather than replacing them. This benefit is
particularly attractive to healthcare entities that have already
committed significant capital to legacy systems and lack resources to
invest in new systems.
- INFORMATION EXCHANGE OVER THE INTERNET. HealthWeb allows health plans to
communicate and conduct business with providers, members, employers and
brokers over the Internet. It provides an effective way for health plans
to reduce administrative costs, thus increasing resources for medical
services or other uses. HealthWeb can be implemented rapidly and is
designed to work with virtually any existing software being used by a
health plan. In addition, HealthWeb has been integrated with our Erisco
Facets(R) application and is currently being integrated with our RIMS
applications.
- OUTSTANDING SERVICE AND SUPPORT. We believe that excellent customer
support is essential to the success of our business. For all of our
applications, we operate customer service centers 24 hours a day, seven
days a week and employ account managers assigned to each customer. We
employ functional and technical support personnel who work directly with
our account management team and customers to resolve technical,
operational and application problems or questions.
OUR STRATEGY
Our goal is to be the leading single-source provider of information
technology solutions and services for the healthcare industry. Key elements of
our strategy include:
- OFFER A COMPELLING VALUE PROPOSITION. We plan to expand our customer
base by offering a quantified, compelling value proposition that
includes such advantages as: reduced or more predictable information
technology costs, more cost efficient administrative processes,
scalability and a more rapid return on investment.
- CAPITALIZE ON CROSS-SELLING OPPORTUNITIES TO EXISTING CUSTOMERS. We will
continue to aggressively market our ASP solutions to HealtheWare and
HealthWeb customers, and to market our HealthWeb product to HealtheWare
customers. Our strategy is to encourage customers to adopt our
complementary and complete solutions in order to realize the full
benefit of their information technology investments.
- MARKET OUR ASP SOLUTIONS THROUGH PRODUCT "BUNDLES". We plan to increase
customer demand for our ASP solutions by selling pre-integrated product
bundles specific to the payer, benefits administrator and provider
markets. We believe customers will find product bundles appealing
because they consist of best-of-class software applications, are faster
to implement and come with performance warranties.
- BUILD UPON OUR MARKET-LEADING INTERNET PLATFORM. Our HealthWeb Internet
platform has already captured the largest market share among health
plans. By integrating HealthWeb with our HealtheWare applications, we
believe we can build HealthWeb's market share substantially.
- MAINTAIN OUR TECHNOLOGY LEADERSHIP POSITION. We intend to maintain our
technology leadership position held by our ASP solutions, HealtheWare
software applications, and HealthWeb Internet platform. We will continue
to invest in research and development to bring new services to market
and to develop new application features.
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- LEVERAGE OUR STRATEGIC RELATIONSHIPS. We intend to leverage our current
strategic relationships and enter into new relationships to expand our
customer base and service offerings. We have established co-marketing
and sales arrangements with other systems integrators and with our
third-party software vendors. As our customer base grows, we intend to
expand and strengthen these relationships.
- PURSUE ACQUISITIONS. We continually evaluate acquisitions of companies
that expand our market share, product offerings or our technical
capabilities. Since our initial public offering in 1999, we have made
five acquisitions. We intend to pursue additional acquisitions in the
future.
OUR PRODUCTS AND SERVICES
ASP SOLUTIONS
Our ASP solutions integrate, host, monitor and manage leading software
applications from multiple vendors. We deliver software on a cost-predictable
subscription basis, through multi-year contracts that include guaranteed service
levels.
Our ASP solutions free customers from capital investment in information
technology, the operating costs associated with owning software and hardware,
and the cost of managing their information infrastructure. Other advantages of
using our ASP solutions include rapid deployment, reliability, scalability,
lower implementation risk and preservation of legacy systems.
Through our customer connectivity centers in Englewood, Colorado and
Naperville, Illinois, we host and maintain software for our customers on most of
the widely used computing, networking and operating platforms. We provide access
to our hosted applications across high-speed electronic communications channels,
such as frame relay, virtual private networks or the Internet. Each center
operates with state-of-the-art environmental protection systems to maintain high
availability to host systems and wide area network access. Connection to our
host application servers and services is provided using the industry-standard
TCP/IP protocol. We believe this provides the most efficient and cost-effective
transport for information systems services, as well as simplified support and
management. Our network connectivity infrastructure eliminates our customers'
need to manage and support their own computer systems, network and software.
Our ASP solutions provide complete, professionally managed information
technology systems that include desktop and network connections, primary
software applications that are essential to running the business, ancillary
software, and information access and reporting capabilities to aid in data
analysis and decision-making. Customers can choose the combination of our
products and services to best meet their business requirements.
VENDOR PARTNER RELATIONSHIPS. We have acquired rights to license and/or
deploy numerous commercially available software applications from a variety of
healthcare software vendors. For example, we offer managed care information
systems from Quality Care Solutions, Inc. and McKessonHBOC, Inc.; financial
management solutions from Great Plains; practice management systems from Medic
Computer Systems, Raintree Systems, Inc. and Millbrook Corporation; electronic
medical records solutions from The PenChart Corporation and Epic Systems
Corporation. These relationships range from perpetual, reusable software
licenses and contracts to preferred installer agreements to informal
co-marketing arrangements. We enter into relationships with software vendors in
order to offer our customers the widest possible variety of solutions tailored
to their unique information technology needs. Our relationships with our vendor
partners are designed to provide both parties with numerous mutual benefits.
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VENDOR BENEFITS TRIZETTO BENEFITS
- web-enablement of their products; - access to market leading products and
technology solutions;
- professional installation and
operation of their products; - ability to focus on service delivery
rather than software development;
- ease of integration with other third-
party products and services; - co-marketing with industry leading
brands;
- easier software version control;
- enhanced distribution channels; and
- easier add-on product capability;
- competitive pricing.
- lower implementation risk;
- enhanced distribution channels;
- shorter sales cycle;
- lower maintenance and support costs;
and
- potentially higher margins
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In addition, we offer Erisco and RIMS solutions, our proprietary
administrative software for payers and benefits administrators, on an ASP basis.
We expect to expand our product and service offerings as we continue to develop
relationships with additional software application vendors and information
technology services partners. As of December 31, 2000, we had approximately 200
customers accessing our services on an ASP basis.
TRANSFORMATION SERVICES. Our ASP solutions also include consulting services
through our transformation services group. Our transformation services group has
approximately 200 consultants. Our consultants:
- Analyze customers' information technology capabilities and business
strategies and processes and assist customers in achieving competitive
advantage by managing information and data electronically.
- Assist customers in installing and implementing software applications
and technology products through systems analysis and planning,
selection, design, construction, data conversion, testing, business
process development, training and systems support.
- Apply a proprietary methodology to assist customers in identifying
deficiencies in complying with the Health Insurance Portability and
Accountability Act of 1996 (HIPAA) and develop and implement solutions
that assist customers in complying with HIPAA.
- Assist customers in designing and implementing an effective electronic
commerce strategy, including Internet portals, web sites, intranets and
extranets that allow business-to-business and business-to-consumer
transactions.
- Through the Virtual Information Officer program, provide senior-level
management services for customers who either do not employ their own
information technology management or wish to supplement it.
HEALTHEWARE
HealtheWare provides essential administrative software on a licensed basis
to healthcare payers and benefits administrators. HealtheWare offers
market-leading technology solutions from our subsidiaries, Erisco, Inc. and
Resource Information Management Systems, Inc. (RIMS). The Erisco and RIMS brands
are widely recognized in their respective markets for providing advanced
solutions that create operational efficiencies and reduce costs.
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ERISCO. Erisco, founded in 1968, is a leading provider of information
technology for healthcare payers. As of December 31, 2000, our Erisco solutions
were used by over 125 payer organizations serving approximately 70 million
lives, including managed care organizations, managed indemnity carriers,
third-party administrators, and 27% of all Blue Cross Blue Shield organizations.
Our Erisco products provide the core administrative systems required to operate
a healthcare payer organization and are fully configured for use over the
Internet.
Erisco's Facets is a widely implemented, scalable client/server solution
for healthcare payers. Facets supports the transaction demands of all sizes of
managed care organizations. Facets allows healthcare payers to select from a
variety of modules to meet specific business requirements -- including claims
processing, claims re-pricing, capitation/risk fund accounting, premium billing,
provider network management, group/membership administration, referral
management, hospital and medical pre-authorization, case management, customer
service and electronic commerce.
Erisco's Managed Care Enterprise strategy provides built-in
interoperability with complementary software to address the enterprise-wide
needs of a managed care organization. Erisco has extended its core Facets system
through alliances with complementary solutions for physician credentialing,
document imaging, workflow management, data warehousing, decision support,
provider profiling and Health Plan Employer Data Information Set reporting. As
of December 31, 2000, we had 45 customers serving over 30 million members using
Facets.
Facets is available to customers on a license or ASP basis. Facets is
integrated with HealthWeb and is currently offered to health plans as a single
solution. Facets-HealthWeb allows customers to communicate and engage in
commerce with providers, employer groups and members on a real-time basis over
the Internet.
Introduced in 1980, Erisco's Facts is designed for the indemnity insurance
market, specifically managed indemnity, group insurance and third-party
administrators. Facts software is used for the essential administrative
transactions of an indemnity plan, including enrollment, rating and premium
calculation, billing and claims processing. As of December 31, 2000,
approximately 80 customers serving over 40 million members were using
Facts -- more than any other competing packaged software in the U.S. healthcare
industry.
RIMS. We believe that RIMS, founded in 1982, is the nation's largest
provider of automated claims processing technology for benefits administrators.
As of December 31, 2000, our RIMS solutions served over 300 customers with 20
million members, and its software was used to process nearly 180 million claims
annually, or over 7% of the non-pharmacy claims processed in the United States.
RIMS applications automate and simplify the claims adjudication, re-pricing and
payment process, and are available to customers on a licensed or ASP basis.
RIMS' QicLink software engine is the leading product for benefits
administrators. QicLink reduces claims processing costs while increasing staff
productivity. QicLink can be licensed at the customer site or offered on an ASP
basis. RIMS' NetworX was the first enterprise-wide management system and claims
re-pricing solution for preferred provider organizations. NetworX complements
ClaimsExchange, which provides Internet connections that allow preferred
provider organizations and healthcare claims payers to exchange information
online. ClaimsExchange allows access to electronic transaction routing between
providers and payers 24 hours a day, seven days a week, such as exchange of
re-priced claims, claims tracking and reporting capabilities. RIMS solutions are
currently being integrated with our HealthWeb Internet platform.
HEALTHWEB
HealthWeb is our Internet platform designed specifically for healthcare
administrators and professionals. Through a standard Internet browser, HealthWeb
allows health plans to exchange information and conduct business with providers,
members, employers and brokers on a secure basis over the Internet. HealthWeb is
installed on the health plan's web servers or hosted on an ASP
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basis and then configured according to customer preferences. As of December 31,
2000, HealthWeb had 14 health plan customers representing 12 million members.
HealthWeb provides an effective way for health plans to reduce
administrative costs and increase resources for medical services or other uses.
HealthWeb creates an on-line "self-service" vehicle, reducing delays and phone
calls and increasing customer satisfaction with prompt access to key
information. HealthWeb's business-to-business transaction capabilities improve
workflow and reduce costs throughout the healthcare system.
HealthWeb's electronic desktop is easy to use and personalized for each
customer, providing access to the business applications and content needed to
perform typical healthcare tasks. HealthWeb is designed to manage online
eligibility, authorizations, referrals, benefit verification, claims status,
claims adjudication and many other transactions benefiting physician offices. It
also supports enrollment, demographic changes, primary care physician selection,
identification card requests and other transactions for employers, brokers and
health plan members.
HealthWeb works across multiple platforms to ensure comprehensive access to
data for all users and provides an advanced method of security to protect
information. HealthWeb is designed to work with legacy healthcare applications
that do not have graphical user interfaces as well as with newer client/server
applications. We believe that the abandonment of legacy systems will generally
not serve the best interests of our customers, especially in light of
significant capital outlays customers have recently made in addressing year 2000
system requirements. HealthWeb's proprietary technology used to access and
connect to these legacy systems allows us to maximize value to our customers
while minimizing risks of business interruption.
HealthWeb's electronic healthcare business platform is built using industry
standard technology. The system is multi-tiered and contains a collection of
healthcare modules that handle core electronic transaction processing. HealthWeb
operates based upon a set of powerful utilities that allow configuration by us
or the customer. These utilities control security, data access, presentation,
data capture, business logic, workflow and disposition of transactions.
HealthWeb uses XML technology to interact with other applications and also works
with industry standard middleware.
We anticipate that the number of offerings available through HealthWeb will
grow, as we continue to develop proprietary products and relationships with
additional Internet service and content partners. HealthWeb is integrated with
Facets and is currently being integrated to function with RIMS software.
SALES AND MARKETING
Our sales and marketing approach is to promote TriZetto as the single
source for a broad range of healthcare information technology products and
services. As of December 31, 2000, we had approximately 70 sales and marketing
employees throughout the United States. Our professional sales force, comprised
of experienced sales executives with established track records, sells our entire
range of offerings, including ASP, software licenses, Internet technology and
business and consulting services to current and prospective customers. The sales
force is specifically focused on three target markets -- payers, providers and
benefits administrators. A structured sales methodology is employed throughout
all stages of the sales cycle, including lead generation, qualification and
close. We also dedicate resources to work at the executive level to understand
the customer's business strategy and requirements.
Our marketing organization is organized by target market and is closely
aligned with the sales force to provide market specific campaigns and lead
generation initiatives for our ASP, software licenses, Internet technology and
business and consulting services. These initiatives include direct mail
campaigns, marketing collateral, trade shows, seminars and events. The marketing
organization also develops and supports our corporate positioning and brands.
Our comprehensive
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corporate communications program includes advertising, media relations and
industry analyst relations.
Our transformation services group works closely with the sales organization
to provide a consultative, executive selling approach that complements our sales
program. This team of healthcare information technology professionals is trained
in a proprietary assessment methodology that allows a quick and comprehensive
analysis of a customer's information technology capabilities and requirements.
In conjunction with their consulting responsibilities, our transformation
services group identifies opportunities to introduce customers to the broad
range of applications and technology solutions available to them, including
those that we offer.
CUSTOMER SERVICE
We believe that a high level of support is necessary to maintain long-term
relationships with our customers. An account manager is assigned to each of our
customers and is responsible for proactively monitoring customer satisfaction,
exposing customers to additional training and process-improvement opportunities
and coordinating issue resolution. We employ functional and technical support
personnel who work directly with our account management team and customers to
resolve technical, operational and application problems or questions. Our
service desk provides a wide range of customer support functions. Our customers
may contact the service desk through a toll-free number 24 hours a day, seven
days a week.
Because we support multiple applications and technology solutions, our
functional and technical support staff are grouped and trained by specific
application and by application type. These focused staff groups have
concentrated expertise that we can deploy as needed to address customer needs.
We cross-train employees to support multiple applications and technology
solutions to create economies-of-scale in our support staff.
We further leverage the capabilities of our support staff through the use
of sophisticated computer software that tracks solutions to common computer and
software-related problems. This allows our support staff to learn from the
experience of other people within the organization and it reduces the time it
takes to solve problems. As of December 31, 2000, we had approximately 435
employees and independent contractors providing technical support functions for
our customers.
In addition, we provide business services support for our customers in the
areas of claims processing, billing and enrollment, membership services,
provider contracting and provider credential verification services. As of
December 31, 2000, we had approximately 345 employees and independent
contractors providing such support services.
COMPETITION
The market for healthcare information technology services is intensely
competitive, rapidly evolving, highly fragmented and subject to rapid
technological change. By using proprietary technologies and methodologies, we
integrate and deliver packaged software applications, Internet connections,
electronic communication infrastructure and information technology consulting
services. Our competitors provide some or all of the services that we provide.
Our competitors can be categorized as follows:
- information technology outsourcing companies, such as Computer Sciences
Corporation, Electronic Data Systems Corporation and Perot Systems
Corporation;
- healthcare information software vendors, such as Cerner Corporation, IDX
Systems Corporation and McKessonHBOC, Inc.;
- healthcare information technology consulting firms, such as First
Consulting Group, Inc., Superior Consultant Holdings Corporation and the
consulting divisions or former affiliates of the major accounting firms;
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- application services providers, such as Exodus Communications, Inc. and
USinternetworking, Inc.; and
- healthcare e-commerce and portal companies, such as WebMD Corporation.
Each of these types of companies can be expected to compete with us within
various segments of the healthcare information technology market. Furthermore,
major software information systems companies and other entities, including those
specializing in the healthcare industry that are not presently offering
applications that compete with our products and services, may enter our markets.
In addition, some of our third-party software vendors compete with us from time
to time by offering their software on a licensed or ASP basis.
We believe companies in our industry primarily compete based on
performance, price, software functionality, customer awareness, ease of
implementation and level of service. Although our competitive position is
difficult to characterize due principally to the variety of current and
potential competitors and the evolving nature of our market, we believe that we
presently compete favorably with respect to all of these factors. While our
competition comes from many industry segments, we believe no single segment
offers the integrated, single-source solution that we provide to our customers.
To be competitive, we must continue to enhance our products and services,
as well as our sales, marketing and distribution channels to respond promptly
and effectively to:
- changes in the healthcare industry;
- constantly evolving standards affecting healthcare transactions;
- the challenges of technological innovation and adoption;
- evolving business practices of our customers;
- our competitors' new products and services;
- new products and services developed by our vendor partners and
suppliers; and
- challenges in hiring and retaining information technology professionals.
INTELLECTUAL PROPERTY
Our intellectual property is important to our business. We rely on certain
developed software assets and internal methodologies for performing customer
services. Our transformation services group develops and utilizes information
technology life-cycle methodology and related paper-based and software-based
toolsets to perform customer assessments, planning, design, development,
implementation and support services. We rely primarily on a combination of
copyright, trademark and trade secret laws, confidentiality procedures and
contractual provisions to protect our intellectual property.
Our efforts to protect our intellectual property may not be adequate. Our
competitors may independently develop similar technology or duplicate our
products or services. Unauthorized parties may infringe upon or misappropriate
our products, services or proprietary information. In addition, the laws of some
foreign countries do not protect proprietary rights as well as the laws of the
United States. In the future, litigation may be necessary to enforce our
intellectual property rights or to determine the validity and scope of the
proprietary rights of others. Any such litigation could be time consuming and
costly.
We could be subject to intellectual property infringement claims as we
expand our product and service offerings and the number of our competitors
increases. Defending against these claims, even if not meritorious, could be
expensive and divert our attention from operating our company. If we become
liable to third parties for infringing upon their intellectual property rights,
we could be required to pay a substantial damage award and be forced to develop
noninfringing technology,
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obtain a license or cease using the applications that contain the infringing
technology or content. We may be unable to develop noninfringing technology or
content or obtain a license on commercially reasonable terms, or at all.
We also rely on a variety of technologies that are licensed from third
parties to perform key functions. These third-party licenses are an essential
element of our business as an application services provider. These third-party
licenses may not be available to us on commercially reasonable terms in the
future. The loss of or inability to maintain any of these licenses could delay
the introduction of software enhancements and other features until equivalent
technology can be licensed or developed. Any such delay could materially
adversely affect our ability to attract and retain customers.
SIGNIFICANT CUSTOMERS
As of December 31, 2000, we served approximately 600 customers. QualChoice
of Arkansas, Inc. and Preferred Health Network of Maryland, Inc. each
represented approximately 15% of our total revenue for the twelve months ended
December 31, 2000.
EMPLOYEES
As of December 31, 2000, we had approximately 1,600 employees. Our
employees are not subject to any collective bargaining agreements, and we
generally have good relations with our employees.
BACKLOG
Our 12-month recurring revenue backlog at December 31, 2000 was
approximately $114 million. Our orders that constitute current backlog are
subject to unforeseen changes in implementation schedules and may be cancelled
subject to penalties. Our backlog at any date may not be indicative of demand
for our products and services or actual revenue for any period in the future.
RISK FACTORS
OUR BUSINESS IS CHANGING RAPIDLY, WHICH COULD CAUSE OUR QUARTERLY OPERATING
RESULTS TO VARY AND OUR STOCK PRICE TO FLUCTUATE.
Our quarterly operating results have varied in the past, and we expect that
they will continue to vary in future periods. Our quarterly operating results
can vary significantly based on a number of factors, such as our mix of
non-recurring and recurring revenue, our ability to add new customers, renew
existing accounts, sell additional products and services to existing customers,
meet project milestones and customer expectations, and the timing of new
customer sales. The variation in our quarterly operating results could affect
the market price of our common stock in a manner that may be unrelated to our
long-term operating performance.
We expect to increase activities and spending in substantially all of our
operational areas. We base our expense levels in part upon our expectations
concerning future revenue, and these expense levels are relatively fixed in the
short-term. If we record lower revenue, we may not be able to reduce our
short-term spending in response. Any shortfall in revenue would have a direct
impact on our results of operations. For these and other reasons, we may not
meet the earnings estimates of securities analysts or investors, and our stock
price could decline.
We have experienced long sales and implementation cycles for our
HealtheWare solutions. HealtheWare solutions typically require significant
capital expenditures by customers. Major decisions for large payer organizations
typically range from six to 12 months or more from initial contact to contract
execution. Historically, our implementation cycle has ranged from 12 to 24
months or longer from contract execution to completion of implementation. During
the sales cycle and the
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implementation cycle, we will expend substantial time, effort and financial
resources preparing contract proposals, negotiating the contract and
implementing the solution. We may not realize any revenue to offset these
expenditures, and, if we do, accounting principles may not allow us to recognize
the revenue during corresponding periods, which could harm our future operating
results. Additionally, any decision by our customers to delay implementation may
adversely affect our revenues.
WE HAVE A HISTORY OF OPERATING LOSSES AND CANNOT PREDICT WHEN, OR IF, WE WILL
ACHIEVE PROFITABILITY.
We have lost money in seven of our past eight quarters (through December
31, 2000). Although our revenue has grown in recent periods, we cannot assure
you that our revenue will be maintained at the current level or increase in the
future. In addition, we have a limited operating history and it is difficult to
evaluate our business. Our stockholders must consider the risks, uncertainties,
expenses and difficulties frequently encountered by companies in their early
stages of development, particularly companies in rapidly evolving markets. We
cannot assure you that we will achieve or sustain profitability on either a
quarterly or annual basis.
We currently derive our revenue primarily from providing application
services, software licensing and maintenance, and other services such as
consulting. We depend on the continued demand for healthcare information
technology and related services. We plan to continue investing in administrative
infrastructure, research and development, sales and marketing, and acquisitions.
As a result, we expect that we will lose money through at least the fiscal year
ending December 31, 2001, and we may never achieve or sustain profitability.
WE DEPEND ON OUR SOFTWARE APPLICATION VENDOR RELATIONSHIPS, AND IF OUR SOFTWARE
APPLICATION VENDORS TERMINATE OR MODIFY EXISTING CONTRACTS OR EXPERIENCE
BUSINESS DIFFICULTIES, OR IF WE ARE UNABLE TO ESTABLISH NEW RELATIONSHIPS WITH
ADDITIONAL SOFTWARE APPLICATION VENDORS, IT COULD HARM OUR BUSINESS.
We depend, and will continue to depend, on our licensing and business
relationships with third-party software application vendors. Our success depends
significantly on our ability to maintain our existing relationships with our
vendors and to build new relationships with other vendors in order to enhance
our services and application offerings and remain competitive. Although most of
our licensing agreements are perpetual or automatically renewable, they are
subject to termination in the event that we materially breach such agreements.
We cannot assure you that we will be able to maintain relationships with our
vendors or establish relationships with new vendors. We cannot assure you that
the software, products or services of our third-party vendors will achieve or
maintain market acceptance or commercial success. Accordingly, we cannot assure
you that our existing relationships will result in sustained business
partnerships, successful product or service offerings or the generation of
significant revenue for us.
Our arrangements with third-party software application vendors are not
exclusive. We cannot assure you that these third-party vendors regard our
relationships with them as important to their own respective businesses and
operations. They may reassess their commitment to us at any time and may choose
to develop or enhance their own competing distribution channels and product
support services. If we do not maintain our existing relationships or if the
economic terms of our business relationships change, we may not be able to
license and offer these services and products on commercially reasonable terms
or at all. Our inability to obtain any of these licenses could delay service
development or timely introduction of new services and divert our resources. Any
such delays could materially adversely affect our business, financial condition
and operating results.
Our licenses for the use of third-party software applications are essential
to the technology solutions we provide for our customers. Loss of any one of our
major vendor agreements may have a material adverse effect on our business,
financial condition and operating results.
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REVENUE FROM A LIMITED NUMBER OF CUSTOMERS COMPRISE A SIGNIFICANT PORTION OF OUR
TOTAL REVENUE, AND IF THESE CUSTOMERS TERMINATE OR MODIFY EXISTING CONTRACTS OR
EXPERIENCE BUSINESS DIFFICULTIES, IT COULD ADVERSELY AFFECT OUR EARNINGS.
As of December 31, 2000, we were providing services to approximately 600
customers. Three of our customers, QualChoice of Arkansas, Inc., Preferred
Health Network of Maryland, Inc. and Maxicare Health Plans, Inc. represented an
aggregate of approximately 36% of our total revenue for the twelve months ended
December 31, 2000.
Although we typically enter into multi-year customer agreements, a majority
of our customers are able to reduce or cancel their use of our services before
the end of the contract term, subject to monetary penalties. We also provide
services to some ASP customers without long-term contracts. In addition, many of
our contracts are structured so that we generate revenue based on units of
volume, which include the number of members, number of physicians or number of
users. If our customers experience business difficulties and the units of volume
decline or if a customer ceases operations for any reason, we will generate less
revenue under these contracts and our operating results may be materially and
adversely impacted.
Our operating expenses are relatively fixed and cannot be reduced on short
notice to compensate for unanticipated contract cancellations or reductions. As
a result, any termination, significant reduction or modification of our business
relationships with any of our significant customers could have a material
adverse effect on our business, financial condition and operating results.
WE ARE GROWING RAPIDLY, AND OUR INABILITY TO MANAGE THIS GROWTH COULD HARM OUR
BUSINESS.
We have rapidly and significantly expanded our operations and expect to
continue to do so. This growth has placed, and is expected to continue to place,
a significant strain on our managerial, operational, financial, information
systems and other resources. As of December 31, 2000, we had grown to
approximately 1,600 employees and independent contractors, from approximately 75
employees and independent contractors in December 1997. We expect to hire a
significant number of new employees to support our business. If we are unable to
manage our growth effectively, it could have a material adverse effect on our
business, financial condition and operating results.
OUR ACQUISITION STRATEGY MAY DISRUPT OUR BUSINESS AND REQUIRE ADDITIONAL
FINANCING.
Since inception, we have made several acquisitions and expect to continue
to seek strategic acquisitions as part of our growth strategy. We compete with
other companies to acquire businesses. We expect this competition to increase,
making it more difficult in the future to acquire suitable companies on
favorable terms.
We may be unable to successfully integrate companies that we have acquired
or may acquire in the future in a timely manner. If we are unable to
successfully integrate acquired businesses, we may incur substantial costs and
delays or other operational, technical or financial problems. In addition, the
failure to successfully integrate acquisitions may divert management's attention
from our existing business and may damage our relationships with our key
customers and employees.
To finance future acquisitions, we may issue equity securities that could
be dilutive to our stockholders. We may also incur debt and additional
amortization expenses related to goodwill and other intangible assets as a
result of acquisitions. The interest expense related to this debt and additional
amortization expense may significantly reduce our profitability and have a
material adverse effect on our business, financial condition and operating
results.
OUR NEED FOR ADDITIONAL FINANCING IS UNCERTAIN AS IS OUR ABILITY TO RAISE
FURTHER FINANCING IF REQUIRED.
If we continue to incur losses, we may need additional financing to fund
operations or growth. We cannot assure you that we will be able to raise
additional funds through public or private financings, at any particular point
in the future or on favorable terms. Future financings could adversely affect
your ownership interest in comparison with those of other stockholders.
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OUR BUSINESS WILL SUFFER IF OUR SOFTWARE PRODUCTS CONTAIN ERRORS.
The proprietary and third-party software products we offer are inherently
complex. Despite testing and quality control, we cannot be certain that errors
will not be found in current versions, new versions or enhancements of our
products. Significant technical challenges also arise with our products because
our customers purchase and deploy those products across a variety of computer
platforms and integrate them with a number of third-party software applications
and databases. If new or existing customers have difficulty deploying our
products or require significant amounts of customer support, our costs would
increase. Moreover, we could face possible claims and higher development costs
if our software contains undetected errors or if we fail to meet our customers'
expectations. As a result of the foregoing, we could experience:
- loss of or delay in revenue and loss of market share;
- loss of customers;
- damage to our reputation;
- failure to achieve market acceptance;
- diversion of development resources;
- increased service and warranty costs;
- legal actions by customers against us which could, whether or not
successful, increase costs and distract our management; and
- increased insurance costs.
Our software products contain components developed and maintained by
third-party software vendors, and we expect that we may have to incorporate
software from third-party vendors in our future products. We may not be able to
replace the functions provided by the third-party software currently offered
with our products if that software becomes obsolete, defective or incompatible
with future versions of our products or is not adequately maintained or updated.
Any significant interruption in the availability of these third-party software
products or defects in these products could harm the sale of our products unless
and until we can secure or develop an alternative source. Although we believe
there are adequate alternate sources for the technology currently licensed to
us, such alternate sources may not be available to us in a timely manner, may
not provide us with the same functions as currently provided to us or may be
more expensive than products we currently use.
WE COULD LOSE CUSTOMERS AND REVENUE IF WE FAIL TO MEET THE PERFORMANCE STANDARDS
IN OUR CONTRACTS.
Many of our service agreements contain performance standards. If we fail to
meet these standards, our customers could terminate their agreements with us or
require that we refund part or all of the fees charged under those agreements.
The termination of any of our material services agreements and/or any associated
refunds could have a material adverse effect on our business, financial
condition and operating results.
IF OUR ABILITY TO EXPAND OUR NETWORK INFRASTRUCTURE IS CONSTRAINED IN ANY WAY,
WE COULD LOSE CUSTOMERS AND DAMAGE OUR OPERATING RESULTS.
We must continue to expand and adapt our network and technology
infrastructure to accommodate additional users, increased transaction volumes
and changing customer requirements. We may not be able to accurately project the
rate or timing of increases, if any, in the use of our application services or
HealthWeb or be able to expand and upgrade our systems and infrastructure to
accommodate such increases. We may be unable to expand or adapt our network
infrastructure to meet additional demand or our customers' changing needs on a
timely basis, at a commercially
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reasonable cost or at all. Our current information systems, procedures and
controls may not continue to support our operations while maintaining acceptable
overall performance and may hinder our ability to exploit the market for
healthcare applications and services. Service lapses could cause our users to
switch to the services of our competitors.
PERFORMANCE OR SECURITY PROBLEMS WITH OUR SYSTEMS COULD DAMAGE OUR BUSINESS.
Our customers' satisfaction and our business could be harmed if we or our
customers experience any system delays, failures or loss of data.
Although we devote substantial resources to meeting these demands, errors
may occur. Errors in the processing of customer data may result in loss of data,
inaccurate information and delays. Such errors could cause us to lose customers
and be liable for damages. We currently process substantially all of our
customers' transactions and data at our customer connectivity centers in
Englewood, Colorado and Naperville, Illinois. Although we have safeguards for
emergencies and we have contracted backup processing for our customers' critical
functions, the occurrence of a major catastrophic event or other system failure
at any of our facilities could interrupt data processing or result in the loss
of stored data. In addition, we depend on the efficient operation of
telecommunication providers which have had periodic operational problems or
experienced outages.
A material security breach could damage our reputation or result in
liability to us. We retain confidential customer and patient information in our
customer connectivity centers. Therefore, it is critical that our facilities and
infrastructure remain secure and that our facilities and infrastructure are
perceived by the marketplace to be secure. Despite the implementation of
security measures, our infrastructure may be vulnerable to physical break-ins,
computer viruses, programming errors, attacks by third parties or similar
disruptive problems.
Our services agreements generally contain limitations on liability, and we
maintain insurance with coverage limits of $25 million for general liability and
$10 million for professional liability to protect against claims associated with
the use of our products and services. However, the contractual provisions and
insurance coverage may not provide adequate coverage against all possible claims
that may be asserted. In addition, appropriate insurance may be unavailable in
the future at commercially reasonable rates. A successful claim in excess of our
insurance coverage could have a material adverse effect on our business,
financial condition and operating results. Even unsuccessful claims could result
in litigation or arbitration costs and may divert management's attention from
our existing business.
OUR SUCCESS DEPENDS ON OUR ABILITY TO ATTRACT, RETAIN AND MOTIVATE MANAGEMENT
AND OTHER KEY PERSONNEL.
Our success will depend in large part on the continued services of
management and key personnel. Competition for personnel in the healthcare
information technology market is intense, and there are a limited number of
persons with knowledge of, and experience in, this industry. We do not have
employment agreements with most of our executive officers, so any of these
individuals may terminate his or her employment with us at any time. The loss of
services from one or more of our management or key personnel, or the inability
to hire additional management or key personnel as needed, could have a material
adverse effect on our business, financial condition and operating results.
Although we currently experience relatively low rates of turnover for our
management and key personnel, the rate of turnover may increase in the future.
In addition, we expect to further grow our operations, and our needs for
additional management and key personnel will increase. Our continued ability to
compete effectively in our business depends on our ability to attract, retain
and motivate these individuals.
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WE RELY ON AN ADEQUATE SUPPLY AND PERFORMANCE OF COMPUTER HARDWARE AND RELATED
EQUIPMENT FROM THIRD PARTIES TO PROVIDE SERVICES TO LARGER CUSTOMERS AND ANY
SIGNIFICANT INTERRUPTION IN THE AVAILABILITY OR PERFORMANCE OF THIRD-PARTY
HARDWARE AND RELATED EQUIPMENT COULD ADVERSELY AFFECT OUR ABILITY TO DELIVER OUR
PRODUCTS TO CERTAIN CUSTOMERS ON A TIMELY BASIS.
As we offer our application services and software to a greater number of
customers and particularly to larger customers, we may require specialized
computer equipment which may be difficult to obtain on short notice. Any delay
in obtaining such equipment may prevent us from delivering large systems to our
customers on a timely basis. We also rely on such equipment to meet required
performance standards. If such performance standards are not met, we may be
adversely impacted under our service agreements with our customers.
ANY FAILURE OR INABILITY TO PROTECT OUR TECHNOLOGY AND CONFIDENTIAL INFORMATION
COULD ADVERSELY AFFECT OUR BUSINESS.
Our success depends in part upon proprietary software and other
confidential information. The software and information technology industries
have experienced widespread unauthorized reproduction of software products and
other proprietary technology. We do not own any patents. We rely on a
combination of copyright, trademark and trade secret laws, confidentiality
procedures and contractual provisions to protect our intellectual property.
However, these protections may not be sufficient, and they do not prevent
independent third-party development of competitive products or services.
We believe that our proprietary rights do not infringe upon the proprietary
rights of third parties. However, third parties may assert infringement claims
against us in the future, and we could be required to enter into a license
agreement or royalty arrangement with the party asserting the claim. We may also
be required to indemnify customers for claims made against them.
IF OUR CONSULTING SERVICES REVENUE DOES NOT GROW SUBSTANTIALLY, OUR REVENUE
GROWTH COULD BE ADVERSELY IMPACTED.
Our consulting services revenue represents a significant component of our
total revenue and we anticipate that consulting services revenue will continue
to represent a significant percentage of total revenue in the future. To a large
extent, the level of consulting services revenue depends upon the healthcare
industry's demand for outsourced information technology services and our ability
to deliver products which generate implementation and follow-on consulting
services revenue. Our ability to increase services revenue will depend in large
part on our ability to increase the capacity of our transformation services
group, including our ability to recruit, train and retain a sufficient number of
qualified personnel.
IF WE FAIL TO MEET THE CHANGING DEMANDS OF TECHNOLOGY, WE MAY NOT CONTINUE TO BE
ABLE TO COMPETE SUCCESSFULLY WITH OTHER PROVIDERS OF SOFTWARE APPLICATIONS.
The market for our technology and services is highly competitive and
rapidly changing and requires potentially expensive technological advances. We
believe our ability to compete in this market will depend in part upon our
ability to:
- maintain and continue to develop partnerships with vendors;
- enhance our current technology and services;
- respond effectively to technological changes;
- introduce new technologies; and
- meet the increasingly sophisticated needs of our customers.
Competitors may develop products or technologies that are better or more
attractive than those offered by us or that may render our technology and
services obsolete. Many of our current and
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potential competitors are larger and offer broader services and have
significantly greater financial, marketing and other competitive resources than
us.
PART OF OUR BUSINESS WILL SUFFER IF HEALTH PLAN CUSTOMERS DO NOT ACCEPT INTERNET
SOLUTIONS.
The success of HealthWeb depends on the adoption of Internet solutions by
health plan customers. Our business could suffer dramatically if Internet
solutions are not accepted or not perceived to be effective. The Internet may
not prove to be a viable commercial marketplace for a number of reasons,
including:
- inadequate development of the necessary infrastructure for communication
speed, access and server reliability;
- security and confidentiality concerns;
- lack of development of complementary products, such as high-speed modems
and high-speed communication lines;
- implementation of competing technologies;
- delays in the development or adoption of new standards and protocols
required to handle increased levels of Internet activity; and
- governmental regulation.
We expect Internet use to continue to grow in number of users and volume of
traffic. The Internet infrastructure may be unable to support the demands placed
on it by this continued growth.
Growth in the demand for our application and Internet platform services
depends on the adoption of Internet solutions by healthcare participants, which
requires the acceptance of a new way of conducting business and exchanging
information. To maximize the benefits of our solutions, our customers must be
willing to allow their applications and data to be hosted in our customer
connectivity centers.
THE INTENSIFYING COMPETITION WE FACE FROM BOTH ESTABLISHED ENTITIES AND NEW
ENTRIES IN THE MARKET MAY ADVERSELY AFFECT OUR REVENUE AND PROFITABILITY.
We face intense competition. Many of our competitors and potential
competitors have significantly greater financial, technical, product
development, marketing and other resources and greater market recognition than
we have. Many of our competitors also have, or may develop or acquire,
substantial installed customer bases in the healthcare industry. As a result,
our competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements or to devote greater resources
to the development, promotion and sale of their applications or services than we
can devote.
Our competitors can be categorized as follows:
- information technology outsourcing companies, such as Computer Sciences
Corporation, Electronic Data Systems Corporation and Perot Systems
Corporation;
- healthcare information software vendors, such as Cerner Corporation, IDX
Systems Corporation and McKessonHBOC, Inc.;
- healthcare information technology consulting firms, such as First
Consulting Group, Inc., Superior Consultant Holdings Corporation and the
consulting divisions or former affiliates of the major accounting firms;
- application services providers, such as Exodus Communications, Inc. and
USinternetworking, Inc.; and
- healthcare e-commerce and portal companies, such as WebMD Corporation.
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Each of these types of companies can be expected to compete with us within
the various segments of the healthcare information technology market.
Furthermore, major software information systems companies and other entities,
including those specializing in the healthcare industry that are not presently
offering applications that compete with our technology and services, may enter
these markets. In addition, some of our third-party software vendors may compete
with us from time to time by offering their software on a licensed or ASP basis.
We cannot assure you that we will be able to compete successfully against
current and future competitors or that competitive pressures faced by us will
not have a material adverse effect on our business, financial condition and
operating results.
THE INSOLVENCY OF OUR CUSTOMERS OR THE INABILITY OF OUR CUSTOMERS TO PAY FOR OUR
SERVICES WOULD DECREASE OUR REVENUE.
Healthcare payer organizations are often required to maintain restricted
cash reserves and satisfy strict balance sheet ratios promulgated by state
regulatory agencies. In addition, healthcare payer organizations are subject to
risks that physician groups or associations within their organizations become
subject to costly litigation or become insolvent, which may adversely affect the
financial stability of the payer organizations. If healthcare payer
organizations are unable to pay for our services because of their need to
maintain cash reserves or failure to maintain balance sheet ratios or solvency,
our ability to collect fees for services rendered would be impaired and our
financial condition could be adversely affected.
CONSOLIDATION OF HEALTHCARE PAYER ORGANIZATIONS COULD DECREASE THE NUMBER OF OUR
EXISTING AND POTENTIAL CUSTOMERS.
There has been and continues to be acquisition and consolidation activity
in the healthcare payer organizations industry. Mergers or consolidations of
payer organizations in the future could decrease the number of our existing and
potential customers. A smaller market for our products and services could result
in lower revenue.
CHANGES IN GOVERNMENT REGULATION OF THE HEALTHCARE INDUSTRY COULD ADVERSELY
AFFECT OUR BUSINESS.
During the past several years, the healthcare industry has been subject to
increasing levels of government regulation of, among other things, reimbursement
rates and certain capital expenditures. In addition, proposals to reform the
healthcare system have been considered by Congress. These proposals, if enacted,
may further increase government involvement in healthcare, lower reimbursement
rates and otherwise adversely affect the healthcare industry which could
adversely impact our business. The impact of regulatory developments in the
healthcare industry is complex and difficult to predict, and our business could
be adversely affected by existing or new healthcare regulatory requirements or
interpretations.
Participants in the healthcare industry, such as our payer and provider
customers, are subject to extensive and frequently changing laws and
regulations, including laws and regulations relating to the confidential
treatment and secure transmission of patient medical records and other
healthcare information. Legislators at both the state and federal levels have
proposed additional legislation relating to the use and disclosure of medical
information, and the federal government is likely to enact new federal laws or
regulations in the near future. Pursuant to the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA"), the Department of Health and Human
Services ("DHHS") has issued a series of regulations setting forth security,
privacy and transactions standards for all health plans, clearinghouses and
healthcare providers to follow with respect to individually identifiable health
information. DHHS has issued final regulations mandating the use of standard
transactions and code sets, with compliance required by October 16, 2002. DHHS
has also issued final HIPAA privacy regulations, with a scheduled compliance
date of April 14, 2003 (subject to the outcome of a newly announced 30-day
comment period), and proposed HIPAA security regulations. Many of our customers
will also be subject to state laws implementing the federal
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Gramm-Leach-Bliley Act, relating to certain disclosures of nonpublic personal
health information and nonpublic personal financial information by insurers and
health plans.
Our payer and provider customers must comply with HIPAA, its regulations
and other applicable healthcare laws and regulations. Accordingly, in order for
our products and services to be marketable, they must contain features and
functions that allow our customers to comply with these laws and regulations. We
believe our products currently allow our customers to comply with existing laws
and regulations. However, because some HIPAA regulations have yet to be issued
and because the proposed HIPAA regulations may be modified prior to becoming
final, our products may require modification in the future. If we fail to offer
solutions that permit our customers to comply with applicable laws and
regulations, our business will suffer.
We perform billing and claims services that are governed by numerous
federal and state civil and criminal laws. The federal government in recent
years has imposed heightened scrutiny on billing and collection practices of
healthcare providers and related entities, particularly with respect to
potentially fraudulent billing practices, such as submissions of inflated claims
for payment and upcoding. Violations of the laws regarding billing and coding
may lead to civil monetary penalties, criminal fines, imprisonment or exclusion
from participation in Medicare, Medicaid and other federally funded healthcare
programs for us and our customers. Any of these results could have a material
adverse effect on our business, financial condition and operating results.
Federal and state consumer protection laws may apply to us when we bill
patients directly for the cost of physician services provided. Failure to comply
with any of these laws or regulations could result in a loss of licensure or
other fines and penalties. Any of these results could have a material adverse
effect on our business, financial condition and operating results.
In addition, laws governing healthcare payers and providers are often not
uniform among states. This could require us to undertake the expense and
difficulty of tailoring our products in order for our customers to be in
compliance with applicable state and local laws and regulations.
PART OF OUR BUSINESS IS SUBJECT TO GOVERNMENT REGULATION RELATING TO THE
INTERNET THAT COULD IMPAIR OUR OPERATIONS.
The Internet and its associated technologies are subject to increasing
government regulation. A number of legislative and regulatory proposals are
under consideration by federal, state, local and foreign governments and
agencies. Laws or regulations may be adopted with respect to the Internet
relating to liability for information retrieved from or transmitted over the
Internet, on-line content regulation, user privacy, taxation and quality of
products and services. Many existing laws and regulations, when enacted, did not
anticipate the methods of the Internet-based ASP, software and information
technology solutions we offer. We believe, however, that these laws may be
applied to us. We expect our products and services to be in substantial
compliance with all material federal, state and local laws and regulations
governing our operations. However, new legal requirements or interpretations
applicable to the Internet could decrease the growth in the use of the Internet,
limit the use of the Internet for our products and services or prohibit the sale
of a particular product or service, increase our cost of doing business, or
otherwise have a material adverse effect on our business, results of operations
and financial conditions. To the extent that we market our products and services
outside the United States, the international regulatory environment relating to
the Internet and healthcare services could also have an adverse effect on our
business.
A number of legislative proposals have been made that would impose
additional taxes on the sale of goods and services over the Internet. Although
in October 1998 Congress placed a three-year moratorium on state and local taxes
on Internet access or on discriminatory taxes on electronic commerce, existing
state or local laws were expressly excepted from this moratorium. Once this
moratorium is lifted, some type of federal and/or state taxes may be imposed
upon Internet commerce which could adversely affect our opportunity to derive
financial benefit from such activities.
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ITEM 2 -- PROPERTIES
FACILITIES
As of December 31, 2000, we leased 21 facilities located within the United
States and one facility in India. Our principal executive and corporate offices
are located in Newport Beach, California. Our customer connectivity centers are
located in Englewood, Colorado, and Naperville, Illinois. Our leases have
expiration dates ranging from 2001 to 2009. We believe that our facilities are
adequate for our current operations and that additional leased space can be
obtained if needed.
ITEM 3 -- LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. We currently are
not a party to any legal proceedings, the adverse outcome of which, in
management's opinion, individually or in the aggregate, would have a material
adverse effect on our results of operations or financial position.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders during the fourth
quarter of 2000.
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PART II
ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
We completed our initial public offering of common stock on October 14,
1999. Our common stock has been traded on the Nasdaq National Market under the
symbol "TZIX" since October 8, 1999. Prior to that date, there was no public
market for our common stock and, therefore, no quoted market prices for our
common stock are available.
The following table shows the high and low sales prices of our common stock
as reported on the Nasdaq National Market for the periods indicated:
QUARTER ENDED HIGH LOW
------------- ---- ---
December 31, 2000................................ $23.94 $13.13
September 30, 2000............................... $19.73 $ 8.75
June 30, 2000.................................... $35.75 $10.06
March 31, 2000................................... $91.25 $27.00
December 31, 1999................................ $54.00 $ 6.50
As of March 28, 2001, there were 205 holders of record based on the records
of our transfer agent which do not include beneficial owners of common stock
whose shares are held in the names of various securities brokers, dealers and
registered clearing agencies.
We have never paid cash dividends on our common stock. We currently
anticipate that we will retain earnings, if any, to support operations and to
finance the growth and development of our business and do not anticipate paying
cash dividends in the foreseeable future. The payment of cash dividends by us is
restricted by our current bank credit facilities, which contain restrictions
prohibiting us from paying any cash dividends without the bank's prior approval.
RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of transactions by us from January 1, 2000
through the date hereof involving sales of our securities that were not
registered with the SEC:
- On January 11, 2000, we issued 87,359 shares of our common stock to
former shareholders of Healthcare Media Enterprises, Inc. ("HME") in
exchange for all of the issued and outstanding shares of capital stock
of HME.
- On April 3, 2000, we issued 3,000 shares of our common stock to Allen
Karp in connection with services rendered.
- On May 10, 2000, we issued 293 shares of our common stock to Burns
McClellan, Inc. in connection with services rendered.
- On May 22, 2000, we issued 13,700 restricted shares of our common stock
to eleven consultants in connection with services rendered.
- On August 14, 2000, we issued 417 shares of our common stock to Burns
McClellan, Inc. in connection with services rendered.
- On September 12, 2000, we issued warrants to purchase 300,000 shares of
our common stock to Maxicare Health Plans, Inc. Such warrants are
exercisable at any time at $13.50 per share and expire on September 12,
2005.
- On October 2, 2000, we issued 12,142,857 shares of our common stock to
IMS Health Incorporated in exchange for all of the issued and
outstanding shares of capital stock of Erisco Managed Care Technologies,
Inc. (now known as Erisco, Inc.).
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- On October 2, 2000, we issued 231,404 restricted shares of our common
stock to certain employees of Erisco for their continued service with
Erisco.
- On December 1, 2000, we issued 2,588,427 shares of our common stock to
former shareholders of Resource Information Management Systems, Inc.
("RIMS") in exchange for all of the issued and outstanding shares of
capital stock of RIMS.
- On December 11, 2000, December 20, 2000, and January 4, 2001, we issued
44,047 shares, 91,954 shares, and 11,687 shares, respectively, of our
common stock to former shareholders of HME in connection with our
acquisition of HME on January 11, 2000.
- On December 12, 2000 and December 22, 2000, we issued 47,180 restricted
shares and 35,373 restricted shares, respectively, of our common stock
to certain employees of RIMS for their continued service with RIMS.
- On February 23, 2001, we issued 53,117 restricted shares of our common
stock to three employees in connection with performance bonuses.
No cash proceeds were received from any of the stock sales referred to
above.
We did not employ any underwriters, brokers or finders in connection with
any of the transactions set forth above.
The sales of the securities listed above were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder. The recipients of
securities in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the
instruments representing such securities issued in such transactions. These
sales were made without general solicitation or advertising. Each recipient was
either an accredited investor or a sophisticated investor. All recipients had
adequate access, through their relationships with us, to all relevant
information about us.
USE OF PROCEEDS
On October 7, 1999, our registration statement for shares of common stock
was declared effective by the SEC (File No. 333-84533). We completed our initial
public offering on October 14, 1999, raising net proceeds of $36.0 million. As
of February 28, 2001, we have used all of the net proceeds from our initial
public offering, of which approximately $11.4 million was used for working
capital and other general corporate purposes, approximately $7.6 million was
used to acquire new businesses, approximately $5.9 million was used to pay down
debt, approximately $4.6 million was used for acquisition costs related to
Erisco, and approximately $6.5 million was used for the purchase of property and
equipment.
20
23
ITEM 6 -- SELECTED FINANCIAL DATA
The following selected consolidated financial data, except as noted herein,
has been taken or derived from our audited consolidated financial statements and
should be read in conjunction with the full consolidated financial statements
included herein.
THE TRIZETTO GROUP, INC.
------------------------------------------------
CROGHAN & ASSOCIATES, INC. PERIOD FROM
---------------------------- MAY 27, 1997
NINE MONTHS (DATE OF
YEAR ENDED ENDED INCEPTION) YEAR ENDED DECEMBER 31,
DECEMBER 31, SEPTEMBER 30, TO DECEMBER 31, ----------------------------
1996 1997 1997 1998 1999 2000
------------ ------------- ----------------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenue:
Recurring revenue............................ $ 5,088 $ 3,881 $1,191 $ 5,300 $19,448 $ 61,811
Non-recurring revenue........................ -- -- 1,328 6,131 13,478 27,245
------- ------- ------ ------- ------- --------
Total revenue.................................. 5,088 3,881 2,519 11,431 32,926 89,056
------- ------- ------ ------- ------- --------
Cost of revenue:
Recurring revenue............................ 4,068 3,609 1,250 3,978 17,350 54,929
Non-recurring revenue........................ -- -- 422 3,498 10,037 20,089
------- ------- ------ ------- ------- --------
Total cost of revenue.......................... 4,068 3,609 1,672 7,476 27,387 75,018
------- ------- ------ ------- ------- --------
Gross profit................................... 1,020 272 847 3,955 5,539 14,038
------- ------- ------ ------- ------- --------
Operating expenses:
Research and development..................... -- -- -- 1,084 2,394 8,463
Selling, general and administrative.......... 2,142 2,415 672 2,887 9,366 34,144
Amortization of goodwill and acquired
intangibles................................ -- -- -- -- 783 18,622
Write-off of acquired in-process
technology(1).............................. -- -- -- -- 1,407 1,426
------- ------- ------ ------- ------- --------
Total operating expenses................... 2,142 2,415 672 3,971 13,950 62,655
------- ------- ------ ------- ------- --------
Income (loss) from operations.................. (1,122) (2,143) 175 (16) (8,411) (48,617)
Interest income................................ 21 15 15 210 527 1,394
Interest expense............................... (1,341) (84) (13) (52) (256) (883)
------- ------- ------ ------- ------- --------
Income (loss) before provision for income taxes
and extraordinary item....................... (2,442) (2,212) 177 142 (8,140) (48,106)
Provision for (benefit of) income taxes........ -- -- 74 82 (213) (5,848)
------- ------- ------ ------- ------- --------
Income (loss) before extraordinary item........ (2,442) (2,212) 103 60 (7,927) (42,258)
Extraordinary item:
Gain on forgiveness of debt.................. -- 1,000 -- -- -- --
------- ------- ------ ------- ------- --------
Net income (loss)............................ $(2,442) $(1,212) $ 103 $ 60 $(7,927) $(42,258)
======= ======= ====== ======= ======= ========
Net income (loss) per share:
Basic........................................ $ 0.05 $ 0.01 $ (0.85) $ (1.80)
====== ======= ======= ========
Diluted...................................... $ 0.03 $ 0.00 $ (0.85) $ (1.80)
====== ======= ======= ========
Shares used in computing net income (loss) per
share:
Basic........................................ 2,065 4,937 9,376 23,444
====== ======= ======= ========
Diluted...................................... 4,074 12,783 9,376 23,444
====== ======= ======= ========
THE TRIZETTO GROUP, INC.
CROGHAN & ASSOC. INC. ------------------------------------
--------------------- YEAR ENDED DECEMBER 31,
YEAR ENDED ------------------------------------
1996 1997 1998 1999 2000
--------------------- ------ ------ ------- --------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents, restricted cash, and short-term
investments............................................... $ 1,757 $ 773 $3,681 $24,806 $ 28,384
Total assets................................................ 11,174 2,634 8,720 68,418 363,751
Total short-term debt and capital lease obligations......... -- -- 80 1,857 14,555
Total long-term debt and capital lease obligations.......... 1,400 520 645 2,728 4,440
Mandatorily redeemable convertible preferred stock(2)....... -- -- 6,449 -- --
Total stockholders' equity (deficit)........................ 7,819 563 (741) 51,296 269,430
- ---------------
(1) In connection with our acquisitions in 1999 and 2000, we wrote off $1.4
million per year, of the total purchase price to acquired in-process
technology as technological feasibility of the products had not been
established. See Note 12 of Notes to Consolidated Financial Statements for
an explanation of the acquisitions and the acquired in-process technology.
(2) The mandatory redeemable convertible preferred stock was converted to common
stock at the time of our initial public offering.
21
24
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We provide industry-leading information technology solutions and services
to the healthcare industry, including remotely hosted applications,
client/server software systems, an Internet platform, and consulting and
business outsourcing services. Our customers include managed care organizations,
preferred provider organizations, third-party administrators, provider groups
and physician practice management companies. As of December 31, 2000, we served
approximately 600 customers representing more than 90 million members,
approximately 40% of the insured population in the United States.
We were incorporated in Delaware in May 1997. Since completing our initial
public offering in October 1999, we have completed the following acquisitions,
all of which were accounted for using the purchase method of accounting:
- ----------------------------------------------------------------------------------------------------------
ACQUISITION CLOSING DATE PURCHASE PRICE
CONSIDERATION
- ----------------------------------------------------------------------------------------------------------
Novalis Corporation November 29, 1999 $18.2 million Cash and stock
Finserv Health Care Systems, December 22, 1999 $5.8 million Cash and stock
Inc.
Healthcare Media January 11, 2000 $7.2 million Cash and stock
Enterprises, Inc. (HME)
Erisco Managed Care October 2, 2000 $228.7 million Stock
Technologies, Inc.
Resource Information December 1, 2000 $99.3 million Cash and stock
Management Systems, Inc.
(RIMS)
- ----------------------------------------------------------------------------------------------------------
On October 2, 2000, we acquired all of the issued and outstanding capital
stock of Erisco from IMS Health Incorporated and Erisco became our wholly owned
subsidiary. The purchase price of approximately $228.7 million consisted of
12,142,857 shares of common stock with a value of $15.89 per share, assumed
liabilities of $30.0 million, which includes $14.2 million of deferred tax
liability resulting from the differences between the book and tax bases of the
intangible assets arising as a result of the acquisition, and acquisition costs
of approximately $5.8 million. At the time of the transaction, Erisco's balance
sheet included $32.0 million of cash. Pursuant to the merger agreement and
related stockholders agreement, IMS Health has appointed one member to our Board
of Directors.
On December 1, 2000, we acquired all of the issued and outstanding capital
stock of RIMS and RIMS became our wholly owned subsidiary. The purchase price of
approximately $99.3 million consisted of 2,588,427 shares of common stock with a
value of $21.20 per share, $3.0 million in cash, assumed liabilities of $35.7
million, which includes $16.6 million of deferred tax liability resulting from
the differences between the book and tax bases of the intangible assets arising
as a result of the acquisition, and acquisition costs of approximately $1.0
million. In addition, we assumed employee stock options to purchase
approximately 300,000 shares of our common stock and agreed to issue up to
94,354 shares of restricted common stock to certain employees, of which 82,553
shares have been issued to date.
Our revenue is classified into two categories: (i) recurring or multi-year
contractually-based revenue and (ii) revenue generated from non-recurring
agreements.
Recurring revenue from application services is subscription-based and
billed monthly over a contract term of typically three to seven years. The
amount billed monthly is based on units of
22
25
volume, such as numbers of physicians, members or desktops covered by each
contract. Recurring software maintenance revenue is typically based on one-year
renewable contracts. Recurring revenue is recognized ratably over the term of
the contract. Non-recurring revenue from consulting services is billed
principally on either a time and materials or a fixed fee basis and is
recognized as the services are performed. Non-recurring revenue from software
license sales is typically recognized when revenue recognition criteria have
been satisfied. Cash received in excess of revenue recognized is recorded as
deferred revenue.
Cost of revenue are those costs related to the products and services we
provide to our customers and costs associated with the operation and maintenance
of our customer connectivity centers. These costs include salaries and related
expenses for consulting personnel, customer connectivity centers personnel,
customer support personnel, application software license fees, amortization of
capitalized software development costs, telecommunications costs and maintenance
costs.
Research and development expenses are salaries and related expenses
associated with the development of software applications prior to establishment
of technological feasibility and services and include compensation paid to
engineering personnel and fees to outside contractors and consultants. Costs
incurred internally in the development of our software products are expensed as
incurred as research and development expenses until technological feasibility
has been established, at which time any future production costs are properly
capitalized and amortized to cost of revenue based on current and future revenue
over the remaining estimated economic life of the product.
Selling, general and administrative expenses consist primarily of salaries
and related expenses for sales, account management, marketing, administrative,
finance, legal, human resources and executive personnel, commissions, expenses
for marketing programs and trade shows and fees for professional services.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999.
REVENUE. Total revenue in 2000 increased $56.2 million, or 171%, to $89.1
million from $32.9 million in 1999. Of this increase, $14.6 million was
generated by the acquisitions of HME, Erisco and RIMS and $21.1 million
reflected the impact of a full year of operations of Finserv and Novalis, which
we acquired in late 1999. The remaining increase of $20.5 million primarily
represented growth in both our recurring and non-recurring ASP solutions
revenue.
Recurring revenue in 2000 increased $42.4 million, or 218%, to $61.8
million from $19.4 million in 1999. Of this increase, $9.1 million was generated
by our acquisitions in 2000 and $17.7 million reflected the impact of a full
year of operations of Finserv and Novalis. The remaining increase of $15.6
million primarily represented growth in our ASP solutions.
Non-recurring revenue in 2000 increased $13.8 million, or 102%, to $27.2
million from $13.5 million in 1999. Of this increase, $5.5 million was generated
by our acquisitions in 2000, and $3.5 million reflected the impact of a full
year of operations of Finserv and Novalis. The remaining increase of $4.8
million reflected increases in ASP solutions revenue relating to consulting
services provided by our transformation services group.
COST OF REVENUE. Cost of revenue in 2000 increased $47.6 million, or 174%,
to $75.0 million from $27.4 million in 1999. Of this increase, $9.9 million
represented incremental costs associated with our acquisitions in 2000 and $19.7
million reflected the impact of a full year of operations of Finserv and
Novalis. The remaining increase of $18.0 million was primarily due to the costs
incurred to support the overall expansion of our ASP solutions. As a percentage
of total revenue, cost of revenue approximated 84% in 2000 and 83% in 1999.
23
26
Cost of recurring revenue in 2000 increased $37.6 million, or 217%, to
$54.9 million from $17.4 million in 1999. Of this increase, $5.1 million
represented incremental costs associated with our acquisitions in 2000 and $17.0
million reflected the impact of a full year of operations of Finserv and
Novalis. The remaining increase of $15.5 million was due to additional expenses
for personnel and facilities to support our growing ASP solutions, as well as
increased network operation costs, software license fees, and other costs
required to support our increased consulting revenue related to our ASP
solutions. As a percentage of recurring revenue, cost of recurring revenue
approximated 89% in 2000 and 89% in 1999.
Cost of non-recurring revenue in 2000 increased $10.1 million, or 100%, to
$20.1 million from $10.0 million in 1999. Of this increase, $4.8 million
represented incremental costs associated with our acquisitions in 2000 and $2.7
million reflected the impact of a full year of operations for Finserv and
Novalis. The remaining increase of $2.6 million resulted mainly from the
increase in staffing levels and the use of outside services necessary to support
the increasing demand for our consulting revenue related to our ASP solutions.
As a percentage of non-recurring revenue, cost of non-recurring revenue
approximated 74% in 2000 and 75% in 1999.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased $6.1 million, or 254%, to $8.5 million from $2.4 million in 1999. Of
this increase, $3.1 million represented incremental research and development
costs associated with our acquisitions in 2000 and $2.3 million reflects the
impact of a full year of operations of Finserv and Novalis. The remaining
increase of approximately $700,000 was primarily due to an increase in costs
related to the design and development of our applications and services,
primarily HealthWeb. As a percentage of total revenue, research and development
expenses approximated 10% in 2000 and 7% in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in 2000 increased $24.7 million, or 265%, to $34.1
million from $9.4 million in 1999. Of this increase, $4.6 million represented
incremental costs associated with our acquisitions in 2000 and $3.9 million
reflected the impact of a full year of operations of Finserv and Novalis. The
remaining increase of $16.2 million was due primarily to growing our sales force
and expanding our market presence while introducing new products and integrated
solutions to the market, including growing the management and support functions
during the year. As a percentage of total revenue, selling, general and
administrative expenses approximated 38% in 2000 and 28% in 1999.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles in 2000 increased
$17.8 million, or 2,278% to $18.6 million from $783,000 in 1999. Of this
increase, $13.9 million represented incremental costs associated with our
acquisitions in 2000, and $4.3 million of the increase reflects the impact of a
full year of amortization expense related to our 1999 acquisitions of Finserv
and Novalis. The remaining decrease of $367,000 was due primarily to the write
off of certain intangibles.
WRITE OFF OF ACQUIRED IN-PROCESS TECHNOLOGY. Write off of acquired
in-process technology was $1.4 million in both 2000 and 1999. Our acquisitions
of Creative Business Solutions, Inc. and HealthWeb Systems Ltd. in February 1999
and Novalis in November 1999 resulted in an excess of purchase price over the
fair market value of the net assets acquired of $15.7 million. Of this amount,
$1.4 million was allocated to acquired in-process technology and was written off
in 1999. Our acquisitions of HME, Erisco and RIMS in 2000 resulted in an excess
of purchase price over the fair market value of the net assets acquired of
$281.2 million. Of this amount, $1.4 million related to HME and RIMS was
allocated to acquired in-process technology and was written off in 2000.
INTEREST INCOME. Interest income in 2000 increased $867,000, or 165%, to
$1.4 million from $527,000 in 1999. The increase was due to the increase in cash
available for investing for the entire year from proceeds received from our
initial public offering and the $32.0 million cash received from IMS when we
acquired Erisco.
24
27
INTEREST EXPENSE. Interest expense in 2000 increased $627,000, or 245%, to
$883,000 from $256,000 in 1999. The increase was primarily due to borrowings
under our line of credit and term note in 2000, as well as additional borrowings
on new capital lease agreements during the year.
BENEFIT OF INCOME TAXES. Benefit of income taxes in 2000 increased $5.6
million to $5.8 million from $213,000 in 1999. The benefit was primarily
generated from the net reduction of deferred tax liabilities, primarily
resulting from the amortization of intangible assets relating to the RIMS and
Erisco acquisitions.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998.
REVENUE. Total revenue in 1999 increased $21.5 million, or 188%, to $32.9
million from $11.4 million in 1998. Of this increase, $5.4 million was generated
by our acquisitions of Creative Business Solutions, Inc. and HealthWeb Systems,
Ltd. in February 1999 and Novalis in November 1999. The remaining increase of
$16.1 million represented growth in both our recurring and non-recurring ASP
solutions revenue.
Recurring revenue in 1999 increased $14.1 million, or 267%, to $19.4
million from $5.3 million in 1998. Of this increase, $1.2 million was generated
by our acquisitions in 1999. The remaining increase of $12.9 million primarily
represented the overall increase in demand for our ASP solutions.
Non-recurring revenue in 1999 increased $7.4 million, or 120%, to $13.5
million from $6.1 million in 1998. Of this increase, $4.2 million was generated
by our acquisitions in 1999. The remaining increase of $3.1 million represented
increases in ASP solutions revenue relating to consulting provided by our
transformation services group.
COST OF REVENUE. Cost of revenue in 1999 increased $19.9 million, or 266%,
to $27.4 million from $7.5 million in 1998. Of this increase, $5.0 million
represented incremental costs associated with our acquisitions in 1999. The
remaining increase of $14.9 million was primarily due to the costs incurred to
support the overall expansion of our ASP solutions business. As a percentage of
total revenue, cost of revenue approximated 83% in 1999 and 65% in 1998.
Cost of recurring revenue in 1999 increased $13.4 million, or 336%, to
$17.4 million from $4.0 million in 1998. Of this increase, $1.7 million
represented incremental costs associated with our acquisitions in 1999. The
remaining increase of $11.7 million represented the incremental expenses for
personnel and facilities costs incurred to support our growing ASP solutions
business. Incremental infrastructure costs were also required in 1999 to support
our transition from our former data center to our new customer connectivity
center in Englewood, Colorado. As a percentage of recurring revenue, cost of
recurring revenue approximated 89% in 1999 and 75% in 1998.
Cost of non-recurring revenue in 1999 increased $6.5 million, or 187%, to
$10.0 million from $3.5 million in 1998. Of this increase, $3.3 million
represented incremental costs associated with our acquisitions in 1999. The
remaining increase of $3.2 million resulted mainly from the increase in staffing
levels and the use of outside services necessary to support the increasing
demand for our consulting revenue related to our ASP solutions in 1999. As a
percentage of non-recurring revenue, cost of non-recurring revenue approximated
74% in 1999 and 57% in 1998.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased $1.3 million, or 121%, to $2.4 million from $1.1 million in 1998. Of
this increase, approximately $200,000 represented incremental research and
development costs associated with our acquisitions in 1999. The remaining
increase of $1.1 million was primarily due to the development of our HealthWeb
platform and its related applications. Expenses relating to system enhancements
from which we derive revenue are not classified as research and development and
are included in cost of revenue. As a percentage of total revenue, research and
development expenses approximated 7% in 1999 and 9% in 1998.
25
28
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in 1999 increased $6.5 million, or 224%, to $9.4 million
from $2.9 million in 1998. Of this increase, $2.0 million represented
incremental costs associated with our acquisitions in 1999. The remaining
increase of $4.5 million was due primarily to expansion of the sales force,
staff growth in management and administrative support areas, and expansion of
related office space. As a percentage of total revenue, selling, general and
administrative expenses approximated 28% in 1999 and 25% in 1998.
AMORTIZATION OF INTANGIBLES. Amortization of intangibles in 1999 increased
$783,000 from zero in 1998. This increase reflects the impact of a full year of
amortization expense related to our 1999 acquisitions.
WRITE OFF OF ACQUIRED IN-PROCESS TECHNOLOGY. Our acquisitions of Creative
Business Solutions and HealthWeb Systems in February 1999 resulted in an excess
of purchase price over the fair market value of the assets purchased and
liabilities assumed of $2.5 million. Of this amount, $484,000 was allocated to
acquired in-process technology, based upon an independent appraisal, and was
written-off in 1999. In addition, our acquisition of Novalis in November 1999
resulted in an excess purchase price over the fair market value of the assets
purchased and liabilities assumed of $13.2 million. Of this amount, $923,000 was
allocated to acquired in-process technology, based on an independent appraisal,
and was written off in 1999.
INTEREST INCOME. Interest income in 1999 increased $317,000, or 151%, to
$527,000 from $210,000 in 1998. The increase was due to the incremental cash
invested in 1999 resulting from $4.5 million in gross proceeds we raised in
April 1999, and the full year impact of our investing approximately $6.0 million
in gross proceeds we raised in April 1998. The increase is also a result of the
investment of the net proceeds of $36.0 million raised during our initial public
offering in October 1999.
INTEREST EXPENSE. Interest expense in 1999 increased $204,000, or 392%, to
$256,000 from $52,000 in 1998. The increase is due to interest paid on notes
payable issued in February 1999 in connection with our purchase of HealthWeb
Systems and Creative Business Solutions, notes payable in connection with our
purchase of software applications licenses, and capital lease obligations for
the purchase of computer and other office equipment.
PROVISION FOR (BENEFIT OF) INCOME TAXES. Provision for income tax in 1999
decreased $295,000 to a tax benefit of $213,000 from a tax expense of $82,000 in
1998. The benefit was primarily generated from the pre-tax loss, partially
offset by the recording of a valuation allowance on the deferred tax assets.
26
29
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited consolidated statements of
operations data for the eight quarters ended December 31, 2000. This data has
been derived from unaudited consolidated financial statements that, in the
opinion of our management, include all adjustments consisting only of normal
recurring adjustments that we consider necessary for a fair presentation of the
information when read in conjunction with our audited consolidated financial
statements and the attached notes included herein. The operating results for any
quarter are not necessarily indicative of the results for any future period.
QUARTER ENDED
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1999 1999 1999 1999 2000 2000
--------- -------- ------------- ------------ --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue:
Recurring revenue......... $1,421 $ 4,780 $ 5,640 $ 7,608 $11,967 $12,377
Non-recurring revenue..... 2,832 3,676 3,386 3,584 5,750 5,382
------ ------- ------- ------- ------- -------
Total revenue............... 4,253 8,456 9,026 11,192 17,717 17,759
------ ------- ------- ------- ------- -------
Cost of revenue:
Recurring revenue......... 1,337 3,755 5,444 6,813 11,366 11,505
Non-recurring revenue..... 1,743 2,473 2,701 3,120 4,071 3,827
------ ------- ------- ------- ------- -------
Total cost of revenue....... 3,080 6,228 8,145 9,933 15,437 15,332
------ ------- ------- ------- ------- -------
Gross profit................ 1,173 2,228 881 1,259 2,280 2,427
------ ------- ------- ------- ------- -------
Operating expenses:
Research and
development............. 209 241 748 1,199 1,640 1,575
Selling, general and
administrative.......... 1,184 1,794 2,369 4,016 6,593 8,021
Amortization of goodwill
and acquired
intangibles............. 61 103 108 511 1,628 1,670
Write-off of in-process
technology.............. 484 -- -- 923 536 --
------ ------- ------- ------- ------- -------
Total operating expenses.... 1,938 2,138 3,225 6,649 10,397 11,266
------ ------- ------- ------- ------- -------
Income (loss) from
operations................ (765) 90 (2,344) (5,390) (8,117) (8,839)
Interest income............. 38 38 44 407 263 346
Interest expense............ (32) (68) (77) (81) (27) (156)
------ ------- ------- ------- ------- -------
Income (loss) before
provision for income
taxes..................... (759) 60 (2,377) (5,064) (7,881) (8,649)
Provision for (benefit from)
income
taxes..................... 30 (2) (209) (32) -- --
------ ------- ------- ------- ------- -------
Net income (loss)........... $ (789) $ 62 $(2,168) $(5,032) $(7,881) $(8,649)
====== ======= ======= ======= ======= =======
Net income (loss) per share:
Basic..................... $(0.15) $ 0.01 $ (0.28) $ (0.29) $ (0.42) $ (0.43)
====== ======= ======= ======= ======= =======
Diluted................... $(0.15) $ 0.00 $ (0.28) $ (0.29) $ (0.42) $ (0.43)
====== ======= ======= ======= ======= =======
Shares used in computing net
income (loss) per share:
Basic..................... 5,204 7,217 7,730 17,575 18,888 20,225
====== ======= ======= ======= ======= =======
Diluted................... 5,204 18,014 7,730 17,575 18,888 20,225
====== ======= ======= ======= ======= =======
QUARTER ENDED
----------------------------
SEPTEMBER 30, DECEMBER 31,
2000 2000
------------- ------------
Revenue:
Recurring revenue......... $14,237 $ 23,230
Non-recurring revenue..... 5,170 10,943
------- --------
Total revenue............... 19,407 34,173
------- --------
Cost of revenue:
Recurring revenue......... 12,953 19,106
Non-recurring revenue..... 3,682 8,509
------- --------
Total cost of revenue....... 16,635 27,615
------- --------
Gross profit................ 2,772 6,558
------- --------
Operating expenses:
Research and
development............. 1,436 3,811
Selling, general and
administrative.......... 7,300 12,231
Amortization of goodwill
and acquired
intangibles............. 1,584 13,740
Write-off of in-process
technology.............. -- 890
------- --------
Total operating expenses.... 10,320 30,672
------- --------
Income (loss) from
operations................ (7,548) (24,114)
Interest income............. 315 472
Interest expense............ (466) (235)
------- --------
Income (loss) before
provision for income
taxes..................... (7,699) (23,877)
Provision for (benefit from)
income
taxes..................... -- (5,848)
------- --------
Net income (loss)........... $(7,699) $(18,029)
======= ========
Net income (loss) per share:
Basic..................... $ (0.37) $ (0.53)
======= ========
Diluted................... $ (0.37) $ (0.53)
======= ========
Shares used in computing net
income (loss) per share:
Basic..................... 20,908 33,823
======= ========
Diluted................... 20,908 33,823
======= ========
The figures stated above give effect to the reclassification of deferred
stock compensation from selling, general and administrative to cost of revenue
and research and development. The figures also give effect to the
reclassification of amortization of goodwill and acquired intangibles from
selling, general and administrative expense to its own line item.
27
30
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through a
combination of cash from operations, private financings, an initial public
offering of our common stock and cash obtained from our acquisition of Erisco.
As of December 31, 2000, we had approximately $28.4 million of cash, cash
equivalents and short-term investments, including $1.5 million in restricted
cash.
In October 1999, we completed our initial public offering of 4,480,000
shares of common stock, including 630,000 shares in connection with the exercise
of underwriters' over-allotment option, at a price of $9.00 per share, that
raised approximately $36.0 million, net of underwriting discounts, commissions
and other offering costs. In addition, in connection with the offering, 350,000
shares of common stock were sold by a selling stockholder at $9.00 per share,
for which we received no proceeds. Upon the closing of the offering, all of our
mandatorily redeemable convertible preferred stock converted into approximately
6,276,000 shares of common stock.
Cash used in operating activities in 2000 was $12.6 million. Cash used
during this period was primarily attributable to net losses of $42.3 million,
which was offset in part by depreciation and amortization, provision for
doubtful accounts, amortization of deferred stock compensation, write off of
in-process technology and other changes in operating assets and liability
accounts. These losses were principally related to increased research and
development expenses and sales, general and administrative expenses. In
addition, the losses were generated by the expansion of our infrastructure to
support growing demand of our recurring line of business.
The cash provided by investing activities of $14.8 million in 2000 was
primarily the result of $32.0 million cash received in connection with the
acquisition of Erisco and net sales of $4.2 million in short-term and long-term
equity investments. This increase was partially offset by our purchase of $7.3
million in property and equipment and software licenses and $7.3 million of
payments related to our acquisitions of HME, Erisco and RIMS.
The cash provided by financing activities of $2.8 million in 2000 was
primarily the result of $15.4 million of proceeds from our line of credit and
notes payable, $1.9 million of proceeds from our equipment line of credit, and
$1.1 million of proceeds from the issuance of common stock related to employee
exercise of stock options and employee purchases of common stock. The increase
in cash from these proceeds was reduced by payments we made on the line of
credit as well as principal payments on notes payable and capital lease
obligations of $15.6 million.
In the third quarter of 2000, we entered into a revolving credit facility
with a maximum principal amount of $15.0 million which was amended in the fourth
quarter to include Erisco and RIMS as additional borrowers. The revolving credit
facility is collateralized by all of our receivables and expires in September
2002. Borrowings under the revolving credit facility are limited to and shall
not exceed 80% of qualified accounts as defined in the loan documents. Interest
on the revolving credit facility is prime rate plus 1.5%. Interest is payable
monthly in arrears on the first business day of the month. The revolving credit
facility contains certain covenants, including minimum tangible net worth as
defined, the generation of specified monthly net earnings before interest,
depreciation and amortization, and minimum cash balances. As of December 31,
2000, we had outstanding borrowings on the revolving credit facility of $11.4
million.
In December 1999, we entered into a lease line of credit with a financial
institution. This lease line of credit was specifically established to finance
computer equipment purchases. The lease line of credit had a limit of $2.0
million and expired as scheduled in December 2000. Borrowings under the lease
line of credit at December 31, 2000 totaled approximately $1.5 million, and are
secured by the assets under lease. In accordance with the terms of the lease
line of credit, the outstanding balance is being repaid in monthly installments
of principal and interest through June 2003.
In March 1999, we entered into a revolving line of credit agreement with a
financial institution. In October 1999, we entered into a subsequent agreement
which increased the amount available under the line of credit. The line of
credit has a total capacity of $3.0 million and expires in December 2001.
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Borrowings under the line of credit bear interest at prime plus 0.50% and are
collateralized by compensating cash balances on deposit. Interest is payable
monthly as it accrues. The line of credit agreement contains covenants that we
must adhere to during the term of the agreement including restrictions on the
payment of dividends. As of December 31, 2000, there were no outstanding
borrowings on the line of credit.
We have outstanding seven standby letters of credit in the aggregate amount
of $1.5 million which serve as security deposits for our capital leases.We are
required to maintain a cash balance equal to the outstanding letters of credit,
which is classified as restricted cash on the balance sheet.
Based on the our current operating plan, we believe existing cash, cash
equivalents and short-term investments balances, cash forecasted by management
to be generated by operations and borrowings from existing credit facilities
will be sufficient to meet our working capital and capital requirements for at
least the next twelve months. However, if events or circumstances occur such
that the we do not meet our operating plan as expected, we may be required to
seek additional capital and/or to reduce certain discretionary spending, which
could have a material adverse effect on our ability to achieve our intended
business objectives. We may seek additional financing, which may include debt
and/or equity financing or funding through third party agreements. There can be
no assurance that any additional financing will be available on acceptable
terms, if at all. Any equity financing may result in dilution to existing
stockholders and any debt financing may include restrictive covenants.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 as amended by SFAS 137 and 138
establishes methods of accounting and reporting for derivative instruments and
hedging activities and is effective for all quarters for all years beginning
after June 15, 2000. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The implementation of SFAS 133 will not have a
material impact on our financial statements.
ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial
position, operating results, or cash flows due to adverse changes in financial
and commodity market prices and rates. We are exposed to market risk due to
changes in United States interest rates. This exposure is directly related to
our normal operating and funding activities. Historically, and as of December
31, 2000, we have not used derivative instruments or engaged in hedging
activities.
The interest rate on our $15.0 million revolving credit facility is prime
plus 1.5%. The revolving credit facility expires in September 2002. As of
December 31, 2000, we had outstanding borrowings on the revolving line of credit
of $11.4 million. Changes in interest rates have no impact on our other debt as
all of our other notes have fixed interest rates between 8% and 14%.
We manage interest rate risk by investing excess funds in cash equivalents
and short-term investments bearing variable interest rates, which are tied to
various market indices. As a result, we do not believe that near-term changes in
interest rates will result in a material effect on our future earnings, fair
values or cash flows.
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this Item 8 are
set forth at the pages indicated at Item 14(a)(1).
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ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our Board currently consists of seven directors, divided into three
classes. Each class is elected in alternating years and serves a term of three
years. The Class I directors, Paul F. LeFort and Willard A. Johnson, Jr., shall
serve until the annual meeting of stockholders in 2003. The Class II directors,
William E. Fisher and David M. Thomas, shall serve until the annual meeting of
stockholders in 2001. The Class III directors, Jeffrey H. Margolis, Donald J.
Lothrop and Eric D. Sipf shall serve until the annual meeting of stockholders in
2002. IMS Health Incorporated has a contractual right to designate one
individual to be a Class II member of the Board of Directors. Mr. Thomas has
been designated as IMS' nominee.
The following table sets forth certain information regarding our executive
officers and directors as of March 31, 2001:
DIRECTOR
NAME AGE POSITION CLASS
- ----------------------------- --- -------------------------------------- --------
Jeffrey H. Margolis.......... 37 Chief Executive Officer, President and III
Chairman of the Board
Michael J. Sunderland........ 46 Senior Vice President of Finance, --
Chief Financial Officer and Secretary
Daniel J. Spirek............. 34 President, ASP solutions --
Anthony Bellomo.............. 47 President, HealtheWare --
Gail H. Knopf................ 54 Chief Operating Officer, HealthWeb --
William E. Fisher............ 54 Director II
Willard A. Johnson, Jr. ..... 55 Director I
Paul F. LeFort............... 60 Director I
Donald J. Lothrop............ 41 Director III
Eric D. Sipf................. 52 Director III
David M. Thomas.............. 51 Director II
JEFFREY H. MARGOLIS is our co-founder and has served as our Chief Executive
Officer, President and Director since inception. In August 1999, Mr. Margolis
was named Chairman of the Board. From July 1994 to February 1997, Mr. Margolis
served as Senior Vice President and Chief Information Officer of FHP
International Corporation, a managed care organization. From November 1992 to
June 1994, Mr. Margolis served as Vice President and Chief Information Officer
of TakeCare, Inc., a managed care organization. From September 1989 to October
1992, Mr. Margolis held various executive positions, including Vice President
and Chief Operating Officer of Comprecare, a managed care organization. From
June 1984 to September 1989, Mr. Margolis served in various positions with
Andersen Consulting (now known as Accenture), including his final position as
Manager, Healthcare Consulting. Mr. Margolis received his B.S. degree in
Business Administration -- Management Information Systems from the University of
Illinois at Urbana -- Champaign in 1984. Mr. Margolis earned his State of
Illinois Certified Public Accountant certification in 1984 and his State of
Colorado Certified Public Accountant certification in 1988.
MICHAEL J. SUNDERLAND joined us as our Vice President of Finance, Chief
Financial Officer and Secretary in May 1999. In August 1999, Mr. Sunderland was
named as our Senior Vice President of Finance. From May 1998 to April 1999, Mr.
Sunderland was an independent healthcare consultant. From March 1996 to May
1998, Mr. Sunderland served as the Vice President and Chief Financial
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Officer of Health Net, a California subsidiary of Foundation Health Systems,
Inc., a managed care organization. From April 1994 to March 1996, Mr. Sunderland
was the Chief Financial Officer of Diagnostic Imaging Systems, Inc., a publicly
held medical imaging company. Prior to 1994, Mr. Sunderland held various
executive and management positions in finance for Paragon Ambulatory Surgery,
Inc., Care Enterprises, Inc., Shamrock Investments, American Medical
International, Inc. and Coopers & Lybrand. Mr. Sunderland earned his B.S. degree
in Accounting from Loyola Marymount University in 1977. Mr. Sunderland earned
his State of California Certified Public Accountant certification in 1980.
DANIEL J. SPIREK joined us in May 1997 as our Vice President, Supplemental
Management Services. From June 1999 to January 2000, Mr. Spirek served as our
Senior Vice President, Professional Services Group (now known as transformation
services group). In February 2000, Mr. Spirek was promoted to Executive Vice
President of transformation services group. In July 2000, Mr. Spirek was
promoted to President of ASP Solutions. From July 1994 to May 1997, Mr. Spirek
served as Vice President, Information Services for FHP/PacifiCare, a managed
care organization. Prior to July 1994, Mr. Spirek held various information
technology management positions at TakeCare, Inc., a managed care organization,
Comprecare, Inc., a managed care organization, and a consulting position at
Andersen Consulting (now known as Accenture). Mr. Spirek received his B.S.
degree in Information Management Systems from the University of Colorado in
1988.
ANTHONY BELLOMO joined us in October 2000 as President of HealtheWare. From
March 1994 to October 2000, Mr. Bellomo served as President of Erisco Managed
Care Technologies, Inc., a managed care software development company we acquired
in October 2000. Prior to being named President of Erisco, Mr. Bellomo held
various positions with Erisco since 1977. Mr. Bellomo serves on the board of
directors of one public entity, Cognizant Technology Solutions. Mr. Bellomo
received his B.S. degree in Systems Engineering from Polytechnic Institute of
New York in 1975.
GAIL H. KNOPF joined us in April 1999 and served as our Vice President of
e-Commerce from June 1999 to December 1999. In January 2000, Ms. Knopf was
promoted to Senior Vice President, e-Business. In November 2000, Ms. Knopf was
promoted to Chief Operating Officer of HealthWeb. From April 1997 to March 1999,
Ms. Knopf served as Executive Vice President, Chief Information Officer and a
Director of Management and Technology Solutions, Inc., a physician services
provider. From 1993 to 1997, Ms. Knopf served as Vice President and Chief
Information Officer of Humana, Inc., a managed care organization. From 1969 to
1993, Ms. Knopf held various positions with Humana, both in the managed care and
the hospital divisions, including Vice President of Systems Development. Ms.
Knopf earned her B.A. degree in Mathematics from Vanderbilt University in 1968.
WILLIAM E. FISHER has been a director since March 1999. Mr. Fisher has
served as Chairman of Transaction Systems Architects, Inc., a global provider of
enterprise e-payments and e-commerce software, since founding that company in
November 1993. From March 1987 to November 1993, Mr. Fisher was employed by
Applied Communications, Inc., the predecessor to Transaction Systems. Prior to
March 1987, Mr. Fisher was President of First Data Resources, Government
Services Division. Mr. Fisher is on the board of directors of two public
companies: West Corporation and Transaction Systems Architects, Inc. Mr. Fisher
received his M.B.A. degree from the University of Nebraska in 1974 and his B.S.
degree from Indiana State University in 1973.
WILLARD A. JOHNSON, JR. has been a director since October 2000. For most of
the period from June 1975 until he retired in August 1998, Mr. Johnson served in
various positions for Andersen Consulting (now known as Accenture) including his
final position as Office Managing Partner (Denver). During most of his 24-year
career with Accenture, Mr. Johnson provided information technology expertise to
the healthcare industry. Mr. Johnson received his M.B.A. from Harvard Business
School in 1975 and his B.A. degree in Psychology from Dartmouth College in 1968.
PAUL F. LEFORT has been a director since April 1999. From October 1995,
until he retired in January 2000, Mr. LeFort served as the Chief Information
Officer for United HealthCare Corporation,
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a health and well being company. Mr. LeFort is currently performing independent
consulting services to a variety of venture capital firms and healthcare-related
organizations. From November 1994 to October 1995, Mr. LeFort was the Senior
Vice President and Chief Information Officer for The MetraHealth Companies,
Inc., jointly owned by Travelers Insurance Company and Metropolitan Life
Insurance Company. From 1975 to 1994, Mr. LeFort served as a senior partner at
Deloitte & Touche Management Consulting for Health Care Information Systems. Mr.
LeFort received his B.S. degree in Physics and Economics from Boston College in
1962.
DONALD J. LOTHROP has been a director since April 1998. Mr. Lothrop has
been a Managing Member of Delphi Management Partners II, L.P. since July 1994, a
Managing Member of Delphi Management Partners III, L.L.C. since March 1995, a
Managing Member of Delphi Management Partners IV, L.L.C. since October 1997 and
a Managing Member of Delphi Management Partners V, L.LC. since April 2000, all
of which are venture capital firms. From January 1991 to June 1994, Mr. Lothrop
was a Partner of Marquette Venture Partners, a venture capital firm, where he
focused on the healthcare industry. From 1989 to 1990, Mr. Lothrop worked at
Bain & Company, Inc., a management consulting firm. Mr. Lothrop received his
M.B.A. from Harvard Business School in 1989 and his B.S. degree from
Pennsylvania State University in 1981.
ERIC D. SIPF has been a director since October 2000. From February 1997
until he retired in June 2000, Mr. Sipf was President and Chief Executive
Officer of PacifiCare of Colorado and Regional Vice President (Colorado, Ohio
and Kentucky) of PacifiCare Health Systems, a managed care organization. From
July 1994 to February 1997, Mr. Sipf served as Senior Vice President, Eastern
Division, of FHP International Corporation, a managed care organization. From
January 1985 to June 1994, Mr. Sipf served as President and Chief Executive
Officer of Comprecare, Inc., a managed care organization. From September 1993 to
June 1994, Mr. Sipf also served as President and Chief Executive Officer of
TakeCare of Colorado, a managed care organization. Mr. Sipf received his B.S. in
Business Administration from Indiana University in 1970. Mr. Sipf received his
State of Indiana Certified Public Accountant certificate in 1979.
DAVID M. THOMAS has been a director since January 2001. Since November
2000, Mr. Thomas has served as Chief Executive Officer and Chairman of the Board
of IMS Health Incorporated, a leading provider of information solutions to the
pharmaceutical and healthcare industries. From January 1998 to October 2000, Mr.
Thomas served as Senior Vice President and Group Executive for IBM and was
responsible for the global Personal Systems Group. From January 1996 to January
1998, Mr. Thomas served as General Manager, Global Industries, for IBM and was
responsible for sales and support of top customers of IBM. From August 1995 to
January 1996, Mr. Thomas was General Manager of IBM North America. Prior to
1995, Mr. Thomas held various executive positions at IBM; Mr. Thomas originally
joined IBM in 1972 as a marketing representative. Mr. Thomas serves on the board
of directors of three public companies: IMS Health Incorporated, Cognizant
Technology Solutions and Fortune Brands. Mr. Thomas received his M.S. degree in
Business Administration in 1972 and his B.S. degree in Industrial Engineering in
1971, both from the University of Florida.
OTHER KEY EMPLOYEES
Our current key employees are as follows:
LAWRENCE BRIDGE, 40, joined us in November 1999 as Senior Vice President,
Payer ASP Services. From July 1997 to November 1999, Mr. Bridge served as
President of Novalis Services Corporation, an application services provider for
managed-care and provider-based organizations, which we acquired in November
1999. From February 1997 to July 1997, Mr. Bridge served as a Regional Vice
President for PacifiCare, a managed care organization. From June 1996 to
February 1997, Mr. Bridge served as a Group President for FHP Healthcare, a
managed care organization. From July 1994 to June 1996, Mr. Bridge served as
President of FHP of Utah, a managed care organization. Mr. Bridge received his
M.B.A. degree in 1985 and his B.S. degree in Finance and Marketing in 1982, both
from the University of Utah.
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ANNA MARIE DUNLAP, 47, joined us in October 2000 as Vice President of
Investor Relations. From February 1997 to October 2000, Ms. Dunlap served as
President of Dunlap & Associates, an investor relations consulting firm. From
January 1996 to January 1997, Ms. Dunlap served as Vice President of Investor
Relations for American Medical Response, Inc., a medical transport company. Ms.
Dunlap received her Master's Degree in Human Resources Economics from the
University of Utah in 1980 and her B.S. degree in Child Psychology from Wever
State University in 1974.
CRAIG H. FOSTER, 50, joined us in August 1997 as Director of Human
Resources. In May 2000, Mr. Foster was named as our Vice President, Human
Resources. From June 1989 to July 1997, Mr. Foster served as Corporate Director
of Human Resources of FHP Healthcare/PacifiCare, a managed care organization.
From May 1987 to June 1989, Mr. Foster served as Director of Human Resources of
ICN Pharmaceuticals, Inc. Prior to May 1987, Mr. Foster held various human
resources positions with Baxter Travenol, a medical device manufacturing
company. Mr. Foster received his B.A. degree in Biological Science from
California State University, Fullerton in 1975.
HARVEY GARTE, 51, joined us in June 1999 as Vice President, Corporate
Development. From October 1999 until September 2000, Mr. Garte also served as
our Vice President, Investor Relations. From July 1996 to the present, Mr. Garte
has served as President of Garte & Associates, Inc., an investment banking firm.
From November 1994 to July 1996, Mr. Garte served as President of Garte Torre
Global Capital Markets, an investment banking firm. From 1983 to 1994, Mr. Garte
served as President of The Garte Company, Inc., an investment banking firm. Mr.
Garte earned his B.A. degree in Economics from Adelphi University in 1971, and
his M.B.A. from Lehigh University in 1973.
STEWART H. GLEISCHMAN, 47, joined us in June 1999 as Vice President,
Business Development. From February 1998 to December 1999, Dr. Gleischman was
engaged in private medical practice. From April 1996 to February 1998, Dr.
Gleischman served as Vice President, Mergers and Acquisitions for MedPartners,
Inc., a healthcare company. From September 1995 to April 1998, Mr. Gleischman
was the Vice Chairman and board member of CHS Management Company, a physician
practice management company. From August 1994 to September 1995, Dr. Gleischman
served as President, Chief Financial Officer and Director of Health Source
Management Group, a healthcare organization. Dr. Gleischman received his
Doctorate in Medicine from Eastern Virginia Medical School in 1975 and his B.S.
degree in History from the University of Virginia in 1971.
JOHN G. JORDAN, 49, joined us in October 2000 as Senior Vice President,
Sales and Marketing. From September 1985 to October 2000, Mr. Jordan served in
various positions, including Senior Vice President of Sales and Marketing, with
Erisco Managed Care Technologies, Inc., a managed care software development
company that we acquired in October 2000. Mr. Jordan received his B.S. degree in
English from Fordham University in 1974.
D. BRIAN KARR, 35, joined us in August 1997 as Director of Finance and was
our Chief Financial Officer until May 1999. Mr. Karr was named as our Vice
President of Finance in August 1999. Mr. Karr served as our Director of Finance
from May 1999 to August 1999. Mr. Karr has served as our Treasurer since May
1999. From February 1997 to July 1997, Mr. Karr served as Director of Finance
for Information Services for PacifiCare Health Systems, Inc., a managed care
organization. From October 1994 to February 1997, Mr. Karr served as Director of
Finance for Information Systems for FHP International Corporation, a managed
care organization. Prior to October 1994, Mr. Karr held various management
positions in finance for TakeCare, Inc., a managed care organization, and Ernst
& Young, LLP. Mr. Karr received his B.S. degree in Accounting from Biola
University in 1989. Mr. Karr received his State of California Certified Public
Accountant certification in 1992.
SAMUEL J. KELLERHALS, 45, joined us in October 2000 as Senior Vice
President, Chief Information Officer. From September 1994 to October 2000, Mr.
Kellerhals served as an Associate Partner in the healthcare practice of
Accenture (formerly known as Andersen Consulting). From September 1985 to August
1994 Mr. Kellerhals served as a Manager with Accenture. From January 1981 to
August
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1985, Mr. Kellerhals held various other positions with Accenture. Mr. Kellerhals
received his M.B.A. from the University of Illinois in 1980 and his B.A. degree
from the University of Illinois in 1978.
RICH KERIAN, 46, joined us in October 2000 as Senior Vice President of
Operations at Erisco Managed Care Technologies, Inc., a managed care software
development company that we acquired in October 2000. As Senior Vice President
of Operations at Erisco, Mr. Kerian is responsible for ensuring the effective
operation of Erisco through product development, maintenance and customer
support. Mr. Kerian has held various positions with Erisco since joining the
company in 1984 as Project Manager. Mr. Kerian received his B.S. degree in
Computer Science from New Jersey Institute of Technology in 1976.
TERRY L. KIRCH, 52, joined us as Senior Vice President Benefits
Administration Services, ASP Solutions in December 2000. Mr. Kirch is the
co-founder of Resource Information Management Systems, Inc. a software
development company which we acquired in December 2000. From 1981 to December
2000, Mr. Kirch served as President of RIMS. Mr. Kirch earned his M.B.A. degree
in 1971 and his B.S. degree in Marketing in 1970, both from Northern Illinois
University.
JACOB H. MCQUEEN, 42, joined us in January 2000 as Vice President of
Transformation Services. In July 2000, Mr. McQueen was named as Senior Vice
President, Transformation Services. From January 2000 to December 2000 Mr.
McQueen served as National Director of Healthcare e-Business for
PricewaterhouseCoopers, LLP. From September 1997 to December 1999, Mr. McQueen
served as Senior Manager, Southeast Healthcare Technology Practice of
PricewaterhouseCoopers, LLP. From January 1997 to August 1997, Mr. McQueen
served as Vice President of Operations for TheraTx, a healthcare rehabilitation
company. Prior to 1997, Mr. McQueen held various healthcare management and
consulting positions with KPMG Peat Marwick, Kaiser Permanente and American
Medical International. Mr. McQueen received his M.S. degree in Organization
Development from the Johns Hopkins University in 1992 and his two B.S. degrees
in business and psychology from the University of Alabama in 1985.
CHRISTINE A. MILLER, 36, Vice President, Legal Affairs and Assistant
Secretary, joined us in January 2000. From March 1997 to January 2000, Ms.
Miller was a corporate associate with Stradling Yocca Carlson & Rauth, our
outside counsel. From October 1995 to February 1997, Ms. Miller was a corporate
associate with Keesal, Young & Logan. Ms. Miller received her Juris Doctorate in
May 1995 and her B.S. in Business Administration in May 1987, both from the
University of Southern California. Ms. Miller is admitted to practice law in the
State of California and is a member of various bar associations.
WILLIAM A. SCHULTZ, 51, Mr. Schultz has served as our Senior Vice
President, Provider Services since July 2000. From January 1999 to June 2000,
Mr. Schultz performed consulting duties for us. From October 1997 to December
1998, Mr. Schultz was our Vice President, Marketing. From January 1995 to
October 1997, Mr. Schultz was Vice President of Operations for Croghan &
Associates, Inc., an information services company which became our subsidiary in
October 1997. Mr. Schultz received his M.B.A. in 1974 and his B.S. degree in
Business Administration in 1972, both from the University of Wisconsin.
There are no family relationships between any director, executive officer
or person nominated or chosen to be a director or executive officer.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires our directors and executive officers, and persons who
own more than 10% of a registered class of our equity securities, to file
reports of ownership of, and transactions in, our securities with the SEC. Such
directors, executive officers and 10% stockholders are also required to furnish
us with copies of all Section 16(a) forms they file.
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Based solely upon our review of the copies of Forms 3, 4 and 5 and
amendments thereto furnished to us, or written representations that no annual
Form 5 reports were required, we believe that all forms required under Section
16(a) of the Exchange Act applicable to our directors, officers and any persons
holding 10% or more of our common stock were timely filed with respect to our
fiscal year ended December 31, 2000, except that: (1) Ms. Knopf did not timely
file one Form 4 to reflect one purchase of TriZetto stock in 2000, and (2) FMR
Corp., the parent holding company of Fidelity Ventures Limited, Fidelity
Investors Limited Partnership and Fidelity Investors II Limited Partnership, did
not timely file a Form 3 to represent its consolidated holdings as of our
initial public offering and did not timely file one Form 4 to represent eleven
transfers of TriZetto stock in 2000.
ITEM 11 -- EXECUTIVE COMPENSATION
The following table sets forth compensation earned during the three fiscal
years ended December 31, 1998, 1999 and 2000 by our Chief Executive Officer, and
our four other most highly compensated executive officers who were serving as
executive officers at December 31, 2000 and whose total salary and bonus during
such year exceeded $100,000 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
------------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
-------------------- STOCK UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS OPTIONS(#)
- ------------------------------------------ ---- -------- -------- ---------- ----------
Jeffrey H. Margolis....................... 2000 $290,127 $210,000 -- 48,400
Chairman of the Board, 1999 $240,251 $175,000 -- --
Chief Executive Officer and President 1998 $179,324 $100,000 -- 300,000
Daniel J. Spirek.......................... 2000 $235,311 $122,000 -- 24,000
President, ASP Solutions 1999 $191,406 $105,000 -- --
1998 $160,235 $101,000 -- 100,000
Michael J. Sunderland..................... 2000 $179,460 $ 80,000 -- 4,800
Senior Vice President of Finance, 1999 $125,879 $ 90,000 -- 130,000
Chief Financial Officer and Secretary 1998 -- -- -- --
Anthony Bellomo........................... 2000 $ 62,500 $160,000 $1,400,000 220,000
President, HealtheWare 1999 -- -- -- --
1998 -- -- -- --
Gail H. Knopf............................. 2000 $140,176 $ 40,000 -- --
Chief Operating Officer, 1999 $ 79,621 $ 0 -- 110,000
HealthWeb 1998 -- -- -- --
Although the table does not reflect certain personal benefits, which in the
aggregate are less than the lower of $50,000 or 10% of each Named Executive
Officer's annual salary and bonus, Mr. Margolis' compensation includes $26,625
of loan forgiveness in 1999 and $28,250 of loan forgiveness in 2000.
Mr. Bellomo joined us in October 2000. The figure set forth above reflects
the salary earned from October to December 31, 2000. On October 2, 2000, Mr.
Bellomo was granted 92,562 shares of restricted stock, based upon a closing
price of $15.125. The year-end value of these shares was $1,544,628, based upon
a closing price of $16.6875 on December 29, 2000. One-sixth of the shares of
restricted stock will vest on each of the three year anniversaries of the grant
date if Mr. Bellomo is performing continued service for TriZetto or any of its
subsidiaries on such dates. An additional one-sixth of the shares will vest on
each of December 31, 2001, 2002 and 2003 if Mr. Bellomo is performing continued
service for TriZetto or any of its subsidiaries on such dates and Erisco meets
certain revenue and operating income goals for the prior year. If we pay
dividends on our common stock, Mr. Bellomo will be entitled to receive
corresponding dividends on his shares of restricted stock.
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OPTION GRANTS
The following table sets forth certain information concerning grants of
options to each of our Named Executive Officers during the fiscal year ended
December 31, 2000.
OPTION GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
POTENTIAL REALIZABLE VALUE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------------
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5% 10%
- ----------------------- ---------- ------------ --------- ---------- ------------- -------------
Jeffrey H. Margolis 20,000 <1% $38.9813 1/24/10 $ 374,853 $1,058,689
20,000 <1% $63.2500 2/16/10 $ 608,229 $1,717,804
8,400 <1% $12.8125 5/19/10 $ 67,685 $ 171,527
Daniel J. Spirek 10,000 <1% $35.4375 1/24/10 $ 222,865 $ 564,782
10,000 <1% $57.5000 2/16/10 $ 361,614 $ 916,402
4,000 <1% $12.8125 5/19/10 $ 32,231 $ 81,679
Michael J. Sunderland 4,800 <1% $12.8125 5/19/10 $ 38,677 $ 98,015
Anthony Bellomo 220,000 9% $15.1250 10/02/10 $2,092,647 $5,303,178
Gail H. Knopf -- -- -- -- -- --
The figures above represent options granted pursuant to our 1998 Stock
Option Plan. We granted options to purchase 2,386,375 shares of common stock in
2000. All of the option grants to our Named Executive Officers were granted at
an exercise price equal to or greater than the fair market value of the common
stock on the date of grant, as determined by our Board. The options granted to
Mr. Margolis and Mr. Spirek in February 2000 vest in February 2007, but may be
accelerated to vest in 25% increments on each of the four annual anniversaries
of the date of grant if certain performance goals are attained. The other
options listed above vest in 25% increments on each of the four annual
anniversaries of the date of grant.
The potential realizable value represents amounts, net of exercise price
before taxes that may be realized upon exercise of the options immediately prior
to the expiration of their terms assuming appreciation of 5% and 10% over the
option term. The 5% and 10% are calculated based on rules promulgated by the SEC
and do not reflect our estimate of future stock price growth. The actual value
realized may be greater or less than the potential realizable value set forth in
the table.
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OPTION EXERCISES
The following table sets forth the fiscal year end options values for all
options held by our Named Executive Officers. The values for "in the money"
options represent the positive spread between the exercise prices of existing
stock options and the price of our common stock on December 29, 2000 ($16.6875
per share).
OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES DOLLAR OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END
ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------- ----------- -------- ----------- ------------- ----------- -------------
Jeffrey H. Margolis 25,000 $315,000 125,000 198,400 $2,051,563 $2,494,425
Daniel J. Spirek 25,000 $545,313 25,000 74,000 $ 410,938 $ 837,375
Michael J. Sunderland 32,500 $761,719 -- 102,300 $ 0 $1,596,881
Anthony Bellomo -- -- -- 220,000 $ 0 $ 343,750
Gail H. Knopf -- -- 27,500 82,500 $ 400,531 $1,201,594
DIRECTOR COMPENSATION
Our directors do not receive any payments for their services on the Board,
but they are reimbursed for various expenses incurred in connection with
attendance at Board meetings. In connection with their election to our Board,
Mr. LeFort and Mr. Fisher each received options to purchase 10,000 shares of our
common stock. In connection with their election to our Board, Mr. Johnson and
Mr. Sipf each received options to purchase 15,000 shares of our common stock.
Each of our directors is eligible to receive stock option grants under our 1998
Stock Option Plan.
EMPLOYMENT AND SEVERANCE AGREEMENTS
We have an employment contract with Jeffrey H. Margolis. We do not have any
other employment contracts with our named executive officers.
Mr. Margolis' three year employment agreement dated April 30, 1998,
provides for an annual base salary of $192,000 per year, which is to be reviewed
annually by the Board. Mr. Margolis' current annual salary is $295,000. Mr.
Margolis is entitled to participate in a bonus plan as recommended by our
compensation committee and approved by the Board. Mr. Margolis may participate
in all employee benefit plans or programs generally available to our employees,
and we will pay or reimburse Mr. Margolis for all reasonable and necessary
out-of-pocket expenses he incurs in the performance of his duties. We loaned Mr.
Margolis $100,000 and agreed to forgive $25,000 of the principal amount, along
with any accrued but unpaid interest on such forgiven amount, on each
anniversary of the employment agreement if Mr. Margolis remains an employee. We
granted this loan as a means of providing additional compensation to Mr.
Margolis, while also providing incentive for his continued employment. If Mr.
Margolis is terminated without cause or he voluntarily terminates for good
reason, he is entitled to severance pay in the amount equal to his then current
annual base salary.
We have entered into Change in Control Agreements with certain of our
officers. These agreements provide for severance and other benefits if,
following a Change in Control of TriZetto, the executive's employment terminates
in a way adverse to the executive. If the executive's employment ends within one
to three years following a Change in Control (term varies among
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executives) either because we terminate the executive without cause or because
the executive resigns under circumstances constituting "good reason," the
executive will be entitled to:
- bi-weekly salary through the end of the employment period;
- medical, dental and life insurance coverage through the end of the
employment period;
- outplacement services consistent with our outplacement policy, if any;
- payment on the last day of the employment period in an amount equal to
the sum of the additional contributions that would have been allocated to
the executive's 401(k) account, if any, if the executive had remained
employed through the end of the employment period;
- payment within 30 days of the date of termination of all accrued
vacation, holiday and personal leave days as of the date of termination;
- payment of any unpaid incentive compensation the executive earned through
the date of termination in accordance with the terms of any applicable
incentive compensation plan; and
- acceleration of unvested options held by executives with Change in
Control Agreements, unless such acceleration would trigger the "golden
parachute" excise tax imposed by the U.S. Internal Revenue Code. In such
case, the options will continue to vest as if the executive officer
remained employed by us.
A "Change in Control" is defined in the agreement to occur if (a) a person
becomes the beneficial owner of 50% or more of the combined voting power of our
securities, (b) a majority of the Board changes without the specified approval
of incumbent directors, (c) we merge with another entity in a way that
substantially changes the ownership of existing stockholders, or (d) our
stockholders approve a complete liquidation or dissolution. "Change in Control"
is also deemed to have occurred if an executive's employment with us is
terminated prior to the Change in Control and it is demonstrated that (a) such
termination was at the request of a third party who has taken steps to
effectuate the Change in Control; or (b) such termination arose in connection
with or anticipation of the Change in Control.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of the following two non-employee
directors: Paul F. LeFort and Donald J. Lothrop. No executive officer serves as
a member of the board of directors or compensation committee of any entity that
has one or more executive officers serving on our Board or our Compensation
Committee. Peter D. Mann, one of our former directors, served on the
compensation committee until October 2000.
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ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth specified information with respect to the
beneficial ownership of our common stock as of February 28, 2001 by: (1) each
person (or group of affiliate persons) who is known by us to beneficially own 5%
or more of our outstanding common stock; (2) each of the Named Executive
Officers; (3) each of our directors; and (4) all directors and executive
officers as a group.
The beneficial ownership is calculated based on 36,771,893 shares of our
common stock outstanding as of February 28, 2001. Beneficial ownership is
determined in accordance with SEC rules. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options held by that person that are currently
exercisable within 60 days of February 28, 2001 are deemed outstanding. Such
shares, however, are not deemed outstanding for the purpose of computing the
percentage of each other person. To our knowledge, except pursuant to applicable
community property laws, the persons named in the table have sole voting and
investment power with respect to the shares set forth opposite such person's
name. Unless otherwise indicated, the business address of such stockholder is
c/o The TriZetto Group, Inc., 567 San Nicolas Drive, Suite 360, Newport Beach,
California 92660.
NUMBER OF SHARES
BENEFICIALLY OWNED
------------------------
NAME AND ADDRESS OF BENEFICIAL OWNERS NUMBER PERCENTAGE
- ---------------------------------------------- ---------- ----------
IMS Health Incorporated....................... 12,142,857 33%
200 Nyala Farms
Westport, CT 06880
Delphi Ventures IV, L.P....................... 2,736,014 7%
Delphi BioInvestments IV, L.P.
3000 Sand Hill Road
Building One, Suite 135
Menlo Park, CA 94025
FMR Corp(1)................................... 2,378,372 6%
82 Devonshire St., R25C
Boston, MA 02109-3614
Raymond D. Croghan(2)......................... 2,182,281 6%
275 South Main St., Ste. 105
Longmont, CO 80501
David M. Thomas(3)............................ 12,142,857 33%
Jeffrey H. Margolis(4)........................ 2,688,700 7%
Donald J. Lothrop(5).......................... 2,736,014 7%
William E. Fisher(6).......................... 322,595 <1%
Willard A. Johnson, Jr........................ 400 <1%
Paul F. LeFort(7)............................. 44,900 <1%
Eric D. Sipf.................................. 8,000 <1%
Daniel J. Spirek(8)........................... 332,500 <1%
Michael J. Sunderland......................... 38,036 <1%
Anthony Bellomo(9)............................ 97,562 <1%
Gail H. Knopf(10)............................. 31,700 <1%
All executive officers and directors
as a group (11 persons)(11)................. 18,443,264 50%
- ---------------
(1) FMR Corp is the parent holding company of Fidelity Ventures Limited,
Fidelity Investors Limited Partnership and Fidelity Investors II Limited
Partnership, all of which own shares of our common stock.
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(2) 550,000 of these shares are subject to an option granted by Mr. Croghan to
Mr. Margolis, with a term of five years and an exercise price of $6.50 per
share.
(3) Consists of 12,142,857 shares held by IMS Health Incorporated. Mr. Thomas
is the Chairman of the Board and Chief Executive Officer of IMS Health
Incorporated and disclaims beneficial ownership of such shares.
(4) 1,708,700 shares are held by Jeffrey H. Margolis and his wife, in their
capacities as trustees of the Margolis Family Trust, over which the
trustees have shared voting power. 300,000 shares are held in two
additional trusts over which Mr. Margolis has sole voting power and Mr.
Margolis disclaims beneficial ownership in 150,000 of such shares. The
remaining 10,000 shares are held by Jeffrey H. Margolis. Includes options
for 550,000 shares of common stock granted by Mr. Croghan to Mr. Margolis,
which are immediately exercisable. Also includes Mr. Margolis' options for
120,000 shares of common stock, which are exercisable within 60 days of
February 28, 2001.
(5) Consists of 2,736,014 shares held by Delphi Ventures IV, L.P. and Delphi
BioInvestments IV, L.P. Mr. Lothrop is a Managing Member of Delphi
Management Partners IV, LLC, the general partner of Delphi Ventures IV,
L.P. and Delphi BioInvestments IV, L.P., and disclaims beneficial ownership
of the 2,736,014 shares except to the extent of his pecuniary interest. Mr.
Lothrop's business address is the same as that of Delphi.
(6) Includes options for 10,000 shares of common stock which are exercisable
within 60 days of February 28, 2001. Also includes 162,595 shares of common
stock held by KFS Management, Inc. Mr. Fisher owns 50% of the issued and
outstanding stock of KFS and is an officer and director of KFS and
disclaims beneficial ownership of the 162,595 shares except to the extent
of his pecuniary interest.
(7) Includes options for 10,000 shares of common stock, which are exercisable
within 60 days of February 28, 2001. Also includes 23,000 shares held by
Mr. LeFort's wife, as trustee of a trust of which she is the sole
beneficiary, and Mr. LeFort disclaims beneficial ownership of such shares.
(8) Includes options for 27,500 shares of common stock, which are exercisable
within 60 days of February 28, 2001.
(9) Includes 92,562 shares of restricted stock.
(10) Includes options for 27,500 shares of common stock, which are exercisable
within 60 days of February 28, 2001.
(11) Includes options for 745,000 shares of common stock, which are exercisable
within 60 days of February 28, 2001.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
MARGOLIS $100,000 NOTE. In connection with Mr. Margolis' employment
agreement, dated April 30, 1998, we loaned Mr. Margolis $100,000 in exchange for
a promissory note in the principal sum of $100,000, bearing interest at 6.5% per
year. We forgave $25,000 of the principal amount of this note and the related
interest on each of April 30, 1999 and April 30, 2000, and shall forgive an
additional $25,000 and the related interest on each of the next two
anniversaries of Mr. Margolis' employment agreement, so long as Mr. Margolis
remains our employee. The entire sum of principal and interest of the note is
due on April 30, 2002, and is immediately due if Mr. Margolis commits any act of
default as described in the note. As of December 31, 2000, the total principal
and accrued interest outstanding was $58,667.
GARTE & ASSOCIATES, INC. In 2000, we entered into an agreement with Garte &
Associates, Inc. pursuant to which we would pay Garte & Associates, Inc. an
investment banking fee for certain acquisitions. In 2000, we paid a total of
$250,000 to Garte & Associates, Inc. in connection with our
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acquisitions of Healthcare Media Enterprises, Inc. and Erisco, Inc. In January
2001, we paid $365,000 to Garte & Associates, Inc. in connection with our
acquisition of Resource Information Management Systems, Inc. Harvey Garte, our
Vice President of Corporate Development, is the sole stockholder of Garte &
Associates, Inc.
FUTURE TRANSACTIONS. Any future transactions between us and our officers,
directors or affiliates will either be on terms no less favorable to us than
could be obtained from third parties, will be subject to approval by a majority
of our outside directors or will be consistent with policies approved by a
majority of such outside directors.
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PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) List of documents filed as part of this Form 10-K:
(1) FINANCIAL STATEMENTS.
See Index to Financial Statements and Schedule on page F-1.
(2) FINANCIAL STATEMENT SCHEDULES.
See Index to Financial Statements and Schedule on page F-1.
(3) EXHIBITS.
The following exhibits are filed (or incorporated by reference herein)
as part of this Form 10-K:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
2.1+ Agreement and Plan of Reorganization, dated as of May 16,
2000, by and among TriZetto, Elbejay Acquisition Corp., IMS
Health Incorporated and Erisco Managed Care Technologies,
Inc. (Incorporated by reference to Exhibit 2.1 of TriZetto's
Form 8-K as filed with the SEC on May 19, 2000, File No.
000-27501)
2.2+ Agreement and Plan of Merger, dated as of November 2, 2000,
by and among TriZetto, Cidadaw Acquisition Corp., Resource
Information Management Systems, Inc. ("RIMS"), the
shareholders of RIMS, Terry L. Kirch and Thomas H. Heimsoth
(Incorporated by reference to Exhibit 2.1 of TriZetto's Form
8-K as filed with the SEC on December 18, 2000, File No.
000-27501)
2.3 First Amendment to Agreement and Plan of Merger, dated as of
December 1, 2000, by and among TriZetto, Cidadaw Acquisition
Corp., RIMS, the shareholders of RIMS, Terry L. Kirch and
Thomas H. Heimsoth (Incorporated by reference to Exhibit 2.2
of TriZetto's Form 8-K as filed with the SEC on December 18,
2000, File No. 000-27501)
3.1 Form of Amended and Restated Certificate of Incorporation of
TriZetto, as filed with the Delaware Secretary of State
effective as of October 14, 1999 (Incorporated by reference
to Exhibit 3.2 of TriZetto's Registration Statement on Form
S-1/A, as filed with the SEC on September 14, 1999, File No.
333-84533)
3.2 Certificate of Amendment of Amended and Restated Certificate
of Incorporation of TriZetto, dated October 3, 2000
(Incorporated by reference to Exhibit 3.1 of TriZetto's Form
10-Q as filed with the SEC on November 14, 2000, File No.
000-27501)
3.3 Certificate of Designation of Rights, Preferences and
Privileges of Series A Junior Participating Preferred Stock
of TriZetto, dated October 17, 2000 (Incorporated by
reference to Exhibit 3.2 of TriZetto's Form 10-Q as filed
with the SEC on November 14, 2000, File No. 000-27501)
3.4 Amended and Restated Bylaws of TriZetto effective as of
October 7, 1999 (Incorporated by reference to Exhibit 3.4 of
TriZetto's Registration Statement on Form S-1/A, as filed
with the SEC on August 18, 1999, File No. 333-84533)
4.1 Specimen common stock certificate (Incorporated by reference
to Exhibit 4.1 of TriZetto's Registration Statement on Form
S-1/A as filed with the SEC on September 14, 1999, File No.
333-84533)
4.2 Rights Agreement, dated October 2, 2000, by and between
TriZetto and U.S. Stock Transfer Corporation (Incorporated
by reference to Exhibit 2.1 of TriZetto's Form 8-A12G as
filed with the SEC on October 19, 2000, File No. 000-27501)
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EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.1* First Amended and Restated 1998 Stock Option Plan
(Incorporated by reference to Exhibit 4.1 of TriZetto's Form
S-8 as filed with the SEC on August 7, 2000, File No.
333-43220)
10.2* Form of 1998 Incentive Stock Option Agreement (Incorporated
by reference to Exhibit 10.2 of TriZetto's Registration
Statement on Form S-1 as filed with the SEC on August 5,
1999, File No. 333-84533)
10.3* Form of 1998 Non-Qualified Stock Option Agreement
(Incorporated by reference to Exhibit 10.3 of TriZetto's
Registration Statement on Form S-1 as filed with the SEC on
August 5, 1999, File No. 333-84533)
10.4* 1999 Employee Stock Purchase Plan (Incorporated by reference
to Exhibit 10.4 of TriZetto's Registration Statement on Form
S-1/A as filed with the SEC on August 18, 1999, File No.
333-84533)
10.5* RIMS Stock Option Plan (Incorporated by reference to Exhibit
4.1 of TriZetto's Form S-8 as filed with the SEC on December
21, 2000, File No. 000-27501)
10.6* Employment Agreement, dated April 30, 1998, by and between
TriZetto and Jeffrey H. Margolis (Incorporated by reference
to Exhibit 10.5 of TriZetto's Registration Statement on Form
S-1 as filed with the SEC on August 5, 1999, File No.
333-84533)
10.7 Promissory Note, dated April 30, 1998, by and between
TriZetto and Jeffrey H. Margolis (Incorporated by reference
to Exhibit 10.6 of TriZetto's Registration Statement on Form
S-1 as filed with the SEC on August 5, 1999, File No.
333-84533)
10.8 Form of Indemnification Agreement (Incorporated by reference
to Exhibit 10.7 of TriZetto's Registration Statement on Form
S-1 as filed with the SEC on August 5, 1999, File No.
333-84533)
10.9 Form of Restricted Stock Agreement between TriZetto and
certain consultants and employees (Incorporated by reference
to Exhibit 10.3 of TriZetto's Form 10-Q as filed with the
SEC on August 14, 2000, File No. 000-27501)
10.10* Form of Change of Control Agreement entered into by and
between TriZetto and certain executive officers of TriZetto
effective as of February 18, 2000 (Incorporated by reference
to Exhibit 10.1 of TriZetto's Form 10-Q as filed with the
SEC on May 15, 2000, File No. 000-27501)
10.11 First Amended and Restated Investor Rights Agreement, dated
April 9, 1999 by and among Raymond Croghan, Jeffrey
Margolis, TriZetto, and Series A and Series B Preferred
Stockholders (Incorporated by reference to Exhibit 10.8 of
TriZetto's Registration Statement on Form S-1/A, as filed
with the SEC on August 18, 1999, File No. 333-84533)
10.12 Office Lease Agreement, dated April 26, 1999, between St.
Paul Properties, Inc. and TriZetto (including addendum)
(Incorporated by reference to Exhibit 10.10 of TriZetto's
Registration Statement on Form S-1 as filed with the SEC on
August 5, 1999, File No. 333-84533)
10.13 Sublease Agreement, dated December 18, 1998, between TPI
Petroleum, Inc. and TriZetto (including underlying Office
Lease Agreement by and between St. Paul Properties, Inc. and
Total, Inc.) (Incorporated by reference to Exhibit 10.11 of
TriZetto's Registration Statement on Form S-1 as filed with
the SEC on August 5, 1999, File No. 333-84533)
10.14 First Modification and Ratification of Lease, dated November
1, 1999, by and between TriZetto and St. Paul Properties,
Inc. (Incorporated by reference to Exhibit 10.22 of
TriZetto's Form 10-K as filed with the SEC on March 30,
2000, File No. 000-27501)
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EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.15 Second Modification and Ratification of Lease, dated
December 1999, by and between TriZetto and St. Paul
Properties, Inc. (Incorporated by reference to Exhibit 10.23
of TriZetto's Form 10-K as filed with the SEC on March 30,
2000, File No. 000-27501)
10.16 Third Modification and Ratification of Lease, dated January
15, 2000, by and between TriZetto and St. Paul Properties,
Inc.
10.17 Fourth Modification and Ratification of Lease, dated October
15, 2000, by and between TriZetto and St. Paul Properties,
Inc.
10.18 Form of Voting Agreement (Incorporated by reference to
Exhibit 2.1 of TriZetto's Form 8-K as filed with the SEC on
May 19, 2000, File No. 000-27501)
10.19+ Secured Term Note, dated September 11, 2000, payable by
TriZetto and each of TriZetto's subsidiaries to Heller
Healthcare Finance, Inc. (Incorporated by reference to
Exhibit 10.1 of TriZetto's Form 10-Q as filed with the SEC
on November 14, 2000, File No. 000-27501)
10.20+ Loan and Security Agreement, dated September 11, 2000, by
and among TriZetto, each of TriZetto's subsidiaries, and
Heller Healthcare Finance, Inc. (Incorporated by reference
to Exhibit 10.2 of TriZetto's Form 10-Q as filed with the
SEC on November 14, 2000, File No. 000-27501)
10.21 Revolving Credit Note, dated September 11, 2000, payable by
TriZetto and each of TriZetto's subsidiaries to Heller
Healthcare Finance, Inc. (Incorporated by reference to
Exhibit 10.3 of TriZetto's Form 10-Q as filed with the SEC
on November 14, 2000, File No. 000-27501)
10.22 Amendment No. 1 to Loan and Security Agreement, dated
October 17, 2000, by and among TriZetto, each of TriZetto's
subsidiaries, and Heller Healthcare Finance, Inc.
(Incorporated by reference to Exhibit 10.4 of TriZetto's
Form 10-Q as filed with the SEC on November 14, 2000, File
No. 000-27501)
10.23 Amended and Restated Revolving Credit Note, dated October
17, 2000, payable by TriZetto and each of TriZetto's
subsidiaries to Heller Healthcare Finance, Inc.
(Incorporated by reference to Exhibit 10.5 of TriZetto's
Form 10-Q as filed with the SEC on November 14, 2000, File
No. 000-27501)
10.24+ Amendment No. 2 to Loan and Security Agreement, dated
December 28, 2000, by and among TriZetto, each of TriZetto's
subsidiaries, and Heller Healthcare Finance, Inc.
10.25 Second Amended and Restated Revolving Credit Note, dated
December 28, 2000, payable by TriZetto and each of
TriZetto's subsidiaries to Heller Healthcare Finance, Inc.
10.26 Bank One Credit Facility (including Promissory Note,
Business Loan Agreement and Commercial Pledge and Security
Agreement), dated October 27, 1999 (Incorporated by
reference to Exhibit 10.21 of TriZetto's Form 10-K as filed
with the SEC on March 30, 2000 File No. 000-27501)
10.27 Amendment to Bank One Credit Facility, dated June 22, 2000
(including Promissory Note Modification Agreement, Business
Loan Agreement and Commercial Pledge and Security Agreement)
10.28 Amendment to Bank One Credit Facility, dated November 4,
2000 (including Change in Terms Agreement)
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EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
10.29+ Stockholder Agreement, dated as of October 2, 2000, by and
between TriZetto and IMS Health Incorporated
10.30 Registration Rights Agreement, dated as of October 2, 2000,
by and between TriZetto and IMS Health Incorporated
21.1 Current Subsidiaries of TriZetto
23.1 Consent of PricewaterhouseCoopers LLP
- ---------------
* This exhibit is identified as a management contract or compensatory plan or
arrangement of TriZetto pursuant to Item 14(a) of Form 10-K.
+ Certain exhibits to, and schedules delivered in connection with, this exhibit
have been omitted pursuant to Item 601(b)(2) of Regulation S-K. TriZetto
agrees to supplementary furnish to the SEC a copy of any such exhibit or
schedule upon request.
(b) REPORTS ON FORM 8-K.
On October 17, 2000, we filed a Form 8-K (Item 2) relating to the
consummation of the transactions contemplated by the Agreement and Plan of
Organization which we entered into with Elbejay Acquisition Corp., IMS Health
Incorporated, and Erisco Managed Care Technologies, Inc. on May 16, 2000,
pursuant to which Erisco merged with and into Elbejay resulting in Erisco
becoming a wholly owned subsidiary of TriZetto. On December 4, 2000, in
connection with our filing of a Registration Statement on Form S-3, we filed a
Form 8-K (Item 5) in order to update, through September 30, 2000, the Erisco
financial statements and pro forma financial information that were filed in our
proxy statement dated September 7, 2000 relating to such transaction.
On December 18, 2000, we filed a Form 8-K (Item 2) relating to our
acquisition of all of the issued and outstanding capital stock of Resource
Information Management Systems, Inc. On February 14, 2001, we filed a Form 8-K/A
containing financial statements of the business acquired and pro forma financial
information relating to such transaction.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized on June 11, 2001.
THE TRIZETTO GROUP, INC.
By: /s/ JEFFREY H. MARGOLIS
------------------------------------
Jeffrey H. Margolis,
President, Chief Executive Officer
and Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JEFFREY H. MARGOLIS President, Chief Executive Officer and June 11, 2001
- --------------------------------------- Chairman of the Board (Principal executive
Jeffrey H. Margolis officer)
/s/ MICHAEL J. SUNDERLAND Senior Vice President of Finance, Chief June 11, 2001
- --------------------------------------- Financial Officer and Secretary (Principal
Michael J. Sunderland financial and accounting officer)
/s/ WILLARD A. JOHNSON, JR. Director June 11, 2001
- ---------------------------------------
Willard A. Johnson, Jr.
/s/ DONALD J. LOTHROP Director June 11, 2001
- ---------------------------------------
Donald J. Lothrop
/s/ WILLIAM E. FISHER Director June 11, 2001
- ---------------------------------------
William E. Fisher
Director
- ---------------------------------------
Paul F. LeFort
/s/ ERIC D. SIPF Director June 11, 2001
- ---------------------------------------
Eric D. Sipf
Director
- ---------------------------------------
David M. Thomas
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THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL INFORMATION
PAGE
----
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets -- December 31, 2000 and 1999... F-3
Consolidated Statements of Operations -- For the years ended
December 31, 2000, 1999 and 1998.......................... F-4
Consolidated Statements of Comprehensive Loss............... F-5
Consolidated Statement of Stockholders' Equity
(Deficit) -- For the years ended December 31, 2000, 1999
and 1998.................................................. F-6
Consolidated Statements of Cash Flows -- For the years ended
December 31, 2000, 1999 and 1998.......................... F-7
Notes to Consolidated Financial Statements.................. F-8
Financial Statement Schedule -- Valuation and Qualifying
Accounts.................................................. F-36
F-1
50
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of The TriZetto Group, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 48 present fairly, in all material
respects, the financial position of The TriZetto Group, Inc. and its
subsidiaries at December 31, 2000 and 1999 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 14(a)(1) on page 48 presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
Orange County, California
February 21, 2001
F-2
51
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
-------------------
2000 1999
-------- -------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 23,865 $18,849
Short-term investments.................................... 3,019 5,957
Restricted cash........................................... 1,500 --
Accounts receivable, less allowance for doubtful accounts
of $1,220 and $597, respectively........................ 18,102 8,228
Current portion of note receivable........................ 2,263 --
Notes receivable from related parties..................... 277 25
Prepaid expenses and other current assets................. 4,444 1,776
Income tax receivable..................................... 449 440
-------- -------
Total current assets.................................... 53,919 35,275
Property and equipment, net............................... 25,623 10,797
Capitalized software products, net........................ 479 --
Long-term investments..................................... -- 1,230
Note receivable from related party........................ 25 525
Notes receivable.......................................... 313 --
Goodwill and other intangible assets, net................. 281,607 20,326
Other assets.............................................. 1,785 265
-------- -------
Total assets............................................ $363,751 $68,418
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable.............................................. $ 343 $ 623
Equipment lease and revolving lines of credit............. 12,089 293
Capital lease obligations................................. 2,123 941
Accounts payable.......................................... 9,502 3,102
Accrued liabilities....................................... 19,967 9,172
Income taxes payable...................................... 482 22
Deferred revenue.......................................... 16,991 241
Other liabilities......................................... 263 --
-------- -------
Total current liabilities............................... 61,760 14,394
Notes payable............................................. 264 504
Other long-term liabilities............................... 1,146 --
Capital lease obligations................................. 3,303 1,544
Equipment lease line of credit............................ 873 680
Deferred revenue.......................................... 1,834 --
Deferred taxes............................................ 25,141 --
-------- -------
Total liabilities....................................... 94,321 17,122
-------- -------
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, $0.001 par value, shares authorized:
4,000 (5,000 authorized net of 1,000 designated as
Series A Junior Participating Preferred), shares issued
and outstanding: zero in 2000 and 1999.................. -- --
Series A Junior Participating Preferred stock: $0.001 par
value; shares authorized 1,000: shares issued and
outstanding: zero in 2000 and 1999...................... -- --
Common stock: $0.001 par value; Shares authorized: 95,000
Shares issued and outstanding: 36,597 in 2000 and 20,923
in 1999................................................. 35 20
Additional paid-in capital.................................. 330,061 66,215
Notes receivable from stockholders.......................... (41) (41)
Deferred stock compensation................................. (9,263) (5,786)
Accumulated other comprehensive income...................... 8 --
Accumulated deficit......................................... (51,370) (9,112)
-------- -------
Total stockholders' equity................................ 269,430 51,296
-------- -------
Total liabilities and stockholders' equity.......... $363,751 $68,418
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
52
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2000 1999 1998
--------- -------- --------
Revenue:
Recurring revenue......................................... $ 61,811 $19,448 $ 5,300
Non-recurring revenue..................................... 27,245 13,478 6,131
-------- ------- -------
Total revenue........................................... 89,056 32,926 11,431
-------- ------- -------
Cost of revenue:
Recurring revenue(1)...................................... 54,929 17,350 3,978
Non-recurring revenue(2).................................. 20,089 10,037 3,498
-------- ------- -------
Total cost of revenue................................... 75,018 27,387 7,476
-------- ------- -------
Gross profit................................................ 14,038 5,539 3,955
-------- ------- -------
Operating expenses:
Research and development(3)............................... 8,463 2,394 1,084
Selling, general and administrative(4).................... 34,144 9,366 2,887
Amortization of goodwill and acquired intangibles......... 18,622 783 --
Write-off of acquired in-process technology............... 1,426 1,407 --
-------- ------- -------
Total operating expenses................................ 62,655 13,950 3,971
-------- ------- -------
Loss from operations........................................ (48,617) (8,411) (16)
Interest income............................................. 1,394 527 210
Interest expense............................................ (883) (256) (52)
-------- ------- -------
Income (loss) before income taxes........................... (48,106) (8,140) 142
Provision for (benefit of) income taxes..................... (5,848) (213) 82
-------- ------- -------
Net income (loss)........................................... $(42,258) $(7,927) $ 60
======== ======= =======
Net income (loss) per share:
Basic..................................................... $ (1.80) $ (0.85) $ 0.01
======== ======= =======
Diluted................................................... $ (1.80) $ (0.85) $ 0.00
======== ======= =======
Shares used in computing net income (loss) per share:
Basic..................................................... 23,444 9,376 4,937
======== ======= =======
Diluted................................................... 23,444 9,376 12,783
======== ======= =======
- ---------------
(1) Cost of recurring revenue includes $528, $294 and $11 of amortization of
deferred stock compensation for the years ended December 31, 2000, 1999, and
1998, respectively.
(2) Cost of non-recurring revenue includes $294, $286 and $8 of amortization of
deferred stock compensation for the years ended December 31, 2000, 1999, and
1998, respectively.
(3) Research and development includes $69, $23 and $1 of amortization of
deferred stock compensation for the years ended December 31, 2000, 1999, and
1998, respectively.
(4) Selling, general and administrative includes $1,043, $454 and $2 of
amortization of deferred stock compensation for the years ended December 31,
2000, 1999, and 1998, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
53
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------
2000 1999 1998
-------- ------- ----
Net income (loss)....................................... $(42,258) $(7,927) $60
Other comprehensive income:
Foreign currency translation gain (loss).............. 8 -- --
-------- ------- ---
Comprehensive income (loss)............................. $(42,250) $(7,927) $60
======== ======= ===
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
54
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(IN THOUSANDS)
NOTES ACCUMULATED
COMMON STOCK ADDITIONAL RECEIVABLE DEFERRED OTHER
--------------- PAID-IN FROM STOCK COMPREHENSIVE
SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION INCOME
------ ------ ---------- ------------ ------------ -------------
Balance, December 31, 1997.................... 9,693 $10 $ 463 $ (13) $ -- $ --
Issuance of common stock...................... 75 -- 9 -- -- --
Issuance of common stock for note
receivable.................................. 390 -- 53 (53) -- --
Repurchase of common stock.................... (941) (1) (67) -- -- --
Payments on notes receivable.................. -- -- -- 25 -- --
Notes issued to stockholders.................. -- -- -- (700) -- --
Deferred stock compensation related to
employee stock options...................... -- -- 482 -- (482) --
Amortization of deferred stock compensation... -- -- -- -- 22 --
Net income.................................... -- -- -- -- -- --
------ --- -------- ----- ------- -------
Balance, December 31, 1998.................... 9,217 9 940 (741) (460) --
Issuance of common stock to purchase Creative
Business Solutions, Inc. and HealthWeb
Systems, Ltd. .............................. 655 1 1,145 -- -- --
Issuance of common stock to purchase assets of
Management & Technology Solutions, Inc. .... 60 -- 140 -- -- --
Issuance of common stock for purchase of
Novalis Corporation......................... 549 1 8,999 -- -- --
Issuance of common stock for purchase of
Finserv Health Care Systems, Inc. .......... 49 -- 1,499 -- -- --
Repurchase of common stock in exchange for
notes receivable from stockholders.......... (563) (1) (3) 700 -- --
Deferred stock compensation related to
employee stock options...................... -- -- 6,383 -- (6,383) --
Amortization of deferred stock compensation... -- -- -- -- 1,057 --
Stock compensation............................ -- -- 53 -- -- --
Repurchase common stock....................... (6) -- -- -- -- --
Exercise of common stock options and
warrants.................................... 206 -- 141 -- -- --
Issuance of common stock related to initial
public offering, net of offering costs of
$4,324...................................... 4,480 4 35,992 -- -- --
Conversion of preferred stock to common
stock....................................... 6,276 6 10,926 -- -- --
Net loss...................................... -- -- -- -- -- --
------ --- -------- ----- ------- -------
Balance, December 31, 1999.................... 20,923 20 66,215 (41) (5,786) --
Issuance of common stock to purchase
Healthcare Media Enterprises, Inc. ......... 223 -- 5,189 -- -- --
Issuance of common stock to purchase Erisco
Managed Care Technologies, Inc. ............ 12,143 12 192,911 -- -- --
Issuance of common stock to purchase Resource
Information Management Systems, Inc. ....... 2,588 3 54,862 -- -- --
Issuance of common stock in exchange for
services.................................... 4 -- 99 -- -- --
Value of options assumed for Resource
Information Management Systems, Inc.
acquisition................................. -- -- 4,718 -- -- --
Issuance of stock warrants.................... -- -- 1,716 -- -- --
Cancellation of Novalis Corporation escrowed
shares...................................... (114) -- (2,206) -- -- --
Deferred stock compensation related to
restricted stock grants..................... 325 -- 5,070 -- (5,070) --
Deferred stock compensation related to
employee stock options...................... -- -- 341 -- (341) --
Amortization of deferred stock compensation... -- -- -- -- 1,934 --
Exercise of common stock options.............. 443 -- 316 -- -- --
Employee purchase of common stock............. 62 -- 830 -- -- --
Foreign currency translation gain............. -- -- -- -- -- 8
Net loss...................................... -- -- -- -- -- --
------ --- -------- ----- ------- -------
Balance, December 31, 2000.................... 36,597 $35 $330,061 $ (41) $(9,263) $ 8
====== === ======== ===== ======= =======
RETAINED TOTAL
EARNINGS STOCKHOLDERS'
(ACCUMULATED EQUITY
DEFICIT) (DEFICIT)
------------ -------------
Balance, December 31, 1997.................... $ 103 $ 563
Issuance of common stock...................... -- 9
Issuance of common stock for note
receivable.................................. -- --
Repurchase of common stock.................... (652) (720)
Payments on notes receivable.................. -- 25
Notes issued to stockholders.................. -- (700)
Deferred stock compensation related to
employee stock options...................... -- --
Amortization of deferred stock compensation... -- 22
Net income.................................... 60 60
-------- --------
Balance, December 31, 1998.................... (489) (741)
Issuance of common stock to purchase Creative
Business Solutions, Inc. and HealthWeb
Systems, Ltd. .............................. -- 1,146
Issuance of common stock to purchase assets of
Management & Technology Solutions, Inc. .... -- 140
Issuance of common stock for purchase of
Novalis Corporation......................... -- 9,000
Issuance of common stock for purchase of
Finserv Health Care Systems, Inc. .......... -- 1,499
Repurchase of common stock in exchange for
notes receivable from stockholders.......... (696) --
Deferred stock compensation related to
employee stock options...................... -- --
Amortization of deferred stock compensation... -- 1,057
Stock compensation............................ -- 53
Repurchase common stock....................... -- --
Exercise of common stock options and
warrants.................................... -- 141
Issuance of common stock related to initial
public offering, net of offering costs of
$4,324...................................... -- 35,996
Conversion of preferred stock to common
stock....................................... -- 10,932
Net loss...................................... (7,927) (7,927)
-------- --------
Balance, December 31, 1999.................... (9,112) 51,296
Issuance of common stock to purchase
Healthcare Media Enterprises, Inc. ......... -- 5,189
Issuance of common stock to purchase Erisco
Managed Care Technologies, Inc. ............ -- 192,923
Issuance of common stock to purchase Resource
Information Management Systems, Inc. ....... -- 54,865
Issuance of common stock in exchange for
services.................................... -- 99
Value of options assumed for Resource
Information Management Systems, Inc.
acquisition................................. -- 4,718
Issuance of stock warrants.................... -- 1,716
Cancellation of Novalis Corporation escrowed
shares...................................... -- (2,206)
Deferred stock compensation related to
restricted stock grants..................... -- --
Deferred stock compensation related to
employee stock options...................... -- --
Amortization of deferred stock compensation... -- 1,934
Exercise of common stock options.............. -- 316
Employee purchase of common stock............. -- 830
Foreign currency translation gain............. -- 8
Net loss...................................... (42,258) (42,258)
-------- --------
Balance, December 31, 2000.................... $(51,370) $269,430
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
55
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------
2000 1999 1998
-------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(42,258) $(7,927) $ 60
Adjustments to reconcile net income (loss) to net
Cash provided by (used in) operating activities:
Provision for doubtful accounts......................... 1,357 505 203
Common stock issued for services rendered............... 99 53 --
Amortization of deferred stock compensation............. 1,934 1,057 22
Amortization of deferred stock warrants................. 82 -- --
Write-off of acquired in-process technology............. 1,426 1,407 --
Forgiveness of notes receivable......................... 29 32 --
Deferred taxes.......................................... (5,636) (187) (83)
Loss on disposal of property and equipment.............. 234 -- 187
Depreciation and amortization of property and
equipment.............................................. 5,262 1,633 161
Amortization of intangibles............................. 18,622 783 --
Changes in assets and liabilities (net of acquisitions):
Restricted cash......................................... (1,500) -- --
Accounts receivable..................................... (1,639) (3,080) (2,127)
Prepaid expenses and other current assets............... (1,339) (1,271) (75)
Income tax receivable................................... (9) (34) (406)
Notes receivable........................................ 357 -- --
Accounts payable........................................ 3,700 1,364 32
Accrued liabilities..................................... 3,531 5,190 976
Deferred revenue........................................ 3,931 241 (248)
Other................................................... (739) (110) (16)
-------- ------- -------
Net cash used in operating activities................. (12,556) (344) (1,314)
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of short-term and long-term investments, net......... 4,168 (7,187) --
Purchase of property and equipment and software
licenses................................................ (7,328) (3,208) (750)
Purchase of MedPartners' assets........................... -- (2,630) --
Net cash acquired in (paid for) acquisitions.............. 27,392 (7,338) --
Payment of acquisition-related costs...................... (7,265) (2,657) --
Other..................................................... (2,206) -- --
-------- ------- -------
Net cash provided by (used in) investing activities... 14,761 (23,020) (750)
-------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net............... -- 35,996 9
Proceeds from issuance of mandatorily redeemable
convertible preferred stock, net........................ -- 4,483 6,449
Repurchases of common stock............................... -- -- (720)
Proceeds from issuance of notes payable................... -- -- 56
Proceeds from revolving line of credit, net............... 11,438 -- --
Payments on notes payable................................. (9,689) (1,275) (32)
Proceeds from term note................................... 4,000 -- --
Payments on term note..................................... (4,000) (265) --
Proceeds from equipment line of credit.................... 1,855 -- --
Payments on equipment line of credit...................... (565) -- --
Payments on capital leases................................ (1,382) (448) (15)
Issuance of notes receivable.............................. -- -- (800)
Repayment of notes receivable............................. -- 30 25
Employee exercise of stock options........................ 316 11 --
Employee purchase of common stock......................... 830 -- --
-------- ------- -------
Net cash provided by financing activities............. 2,803 38,532 4,972
-------- ------- -------
Net increase in cash and cash equivalents................. 5,008 15,168 2,908
Effect of exchange rate changes on cash and cash
equivalents............................................. 8 -- --
Cash and cash equivalents at beginning of year............ 18,849 3,681 773
-------- ------- -------
Cash and cash equivalents at end of year.................. $ 23,865 $18,849 $ 3,681
======== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
56
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY
The TriZetto Group, Inc. (the "Company"), was incorporated in the state of
Delaware on May 27, 1997. The Company is a provider of remotely hosted software
applications, both third-party packaged and proprietary software, and related
services used primarily in the healthcare industry. The Company also develops
and supports software products for the healthcare industry. Additionally, the
Company offers an Internet browser application that serves as a portal for the
exchange of healthcare information and services over the Internet. The Company
provides access to its hosted applications either through the Internet or
through traditional networks. The Company markets and sells its software and
services to customers primarily in the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany transactions have been
eliminated in consolidation.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred net losses of $42.2 million and $7.9 million for
the years ended December 31, 2000 and 1999, respectively, has an accumulated
deficit of $51.4 million at December 31, 2000 and has used cash in operating
activities of $12.6 million and $344,000 for the years ended December 31, 2000
and 1999, respectively. The Company has funded its financial needs primarily
through the net proceeds received through its initial public offering in 1999 as
well as other equity (Note 9) and debt financing (Note 6). Also, in connection
with the Company's acquisition of Erisco Managed Care Technologies, Inc. in
October 2000 (Note 12), the Company acquired a cash balance of approximately
$32.0 million. The Company has total cash and cash equivalents, short-term
investments, and restricted cash of $28.4 million and a net working capital
deficiency of $7.8 million at December 31, 2000. Based on the Company's current
operating plan, management believes existing cash, cash equivalents and
short-term investments balances, cash forecasted by management to be generated
by operations and borrowings from existing credit facilities will be sufficient
to meet the Company's working capital and capital requirements for at least the
next twelve months. However, if events or circumstances occur such that the
Company does not meet its operating plan as expected, the Company may be
required to seek additional capital and/or to reduce certain discretionary
spending, which could have a material adverse effect on the Company's ability to
achieve its intended business objectives. The Company may seek additional
financing, which may include debt and/or equity financing or funding through
third party agreements. There can be no assurance that any additional financing
will be available on acceptable terms, if at all. Any equity financing may
result in dilution to existing stockholders and any debt financing may include
restrictive covenants.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-8
57
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents and accounts
receivable. Cash and cash equivalents are deposited in demand and money market
accounts in three financial institutions. Deposits held with banks may exceed
the amount of insurance provided on such deposits. The Company has not
experienced any losses on its deposits of cash and cash equivalents. The
Company's accounts receivable are derived from revenue earned from customers
located in the United States. The Company performs ongoing credit evaluations of
its customers' financial condition and, generally, requires no collateral from
its customers. The Company maintains an allowance for doubtful accounts
receivable based upon the expected collectibility of individual accounts.
The following tables summarize the revenues and accounts receivable
balances from customers in excess of 10% of total revenues and total accounts
receivable balances, respectively:
YEAR ENDED
DECEMBER 31,
--------------------
2000 1999 1998
---- ---- ----
REVENUES:
Company A................................................. 15% -- --
Company B................................................. 15% -- --
Company C................................................. -- 16% 42%
Company D................................................. -- -- 11%
Company E................................................. -- 19% --
Company F................................................. -- -- --
Company G................................................. -- -- --
DECEMBER 31,
--------------------
2000 1999 1998
---- ---- ----
ACCOUNTS RECEIVABLE:
Company A................................................. -- -- --
Company B................................................. -- -- --
Company C................................................. -- -- 56%
Company D................................................. -- -- --
Company E................................................. -- -- --
Company F................................................. -- 13% --
Company G................................................. 10% -- --
FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, short-term investments, accounts receivable
and accounts payable approximate fair value due to their short maturities. Based
on borrowing rates currently available to the Company for loans with similar
terms, the carrying value of its debt obligations approximates fair value.
F-9
58
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash and cash
equivalents include money market funds, commercial paper and various deposit
accounts.
INVESTMENTS
The Company has classified its investments as available-for-sale. Such
investments are recorded at fair value and unrealized gains and losses, if
material, are recorded as a separate component of stockholders' equity, net of
tax, until realized. Interest income is recorded using the effective interest
rate with the associated premium or discount amortized to interest income. The
cost of securities sold is based upon the specific identification method. As of
the balance sheet date, investments with maturity dates of one year or less are
classified as short-term. At December 31, 2000 and 1999, the carrying value
approximated fair value. Investments consist of corporate bonds and debt
securities.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated on a
straight-line basis over their estimated useful lives: computer equipment,
equipment and software are depreciated over five years and furniture and
fixtures are depreciated over seven years. Leasehold improvements are amortized
over their estimated useful lives or the lease term, if shorter. Upon retirement
or sale, the cost and related accumulated depreciation are removed from the
balance sheet and the resulting gain or loss is reflected in operations.
Maintenance and repairs are charged to operations as incurred.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill arising from the Company's acquisitions is being amortized on a
straight-line basis over their estimated lives of three to seven years. Other
intangible assets arising from the Company's acquisitions consist of acquired
work force, customer lists, core technology and trade names which are being
amortized on a straight-line basis over their estimated useful lives of two to
five, five, three to four and five years, respectively. Software technology
rights are amortized on a straight-line basis over the lesser of the contract
term or five years.
LONG-LIVED ASSETS
Long-lived assets and intangible assets, including enterprise level
goodwill, are reviewed for impairment when events or changes in circumstances
indicate the carrying amount of an asset may not be recoverable. Recoverability
is measured by comparison of the asset's carrying amount to future net
undiscounted cash flows the assets are expected to generate. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the projected
discounted future net cash flows arising from the asset. The discount rate
applied to these cash flows is based on a discount rate commensurate with the
risks involved. No impairment has been indicated to date.
REVENUE RECOGNITION
The Company has adopted the provisions of the Securities and Exchange
Commission ("SEC") Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue
Recognition", which outlines the basic criteria that must be met to recognize
revenue and provides guidance for presentation of
F-10
59
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
revenue and for disclosure related to revenue recognition policies in the
financial statements filed with the SEC. The adoption of SAB 101 had no material
impact on the financial statements.
The Company's revenue is classified into two categories: (i) recurring or
multi-year contractually-based revenue and (ii) revenue generated from
non-recurring agreements. Revenue is recognized when persuasive evidence of an
arrangement exists, the product or service has been delivered, fees are fixed
and determinable, collectibility is probable and when all other significant
obligations have been fulfilled.
The Company generates recurring revenue from several sources, including the
sale of maintenance and support on its software products, and from the hosting
of application services. Recurring software maintenance revenue is typically
based on one-year renewable contracts. Software maintenance and support revenues
are recognized ratably over the contract period. Cash received in advance is
recorded as deferred revenue. Recurring revenue from application services is
subscription-based and billed monthly over a contract term of typically three to
seven years. Many of the agreements associated with application services contain
performance standards that require the Company to maintain a certain level of
operating performance related to those applications. This performance is
measured on a monthly basis by the Company prior to the recording of the
application services revenues. Software license fees under arrangements where
the Company hosts the software and the customer does not have the ability to
take possession of the software during the hosting period, are recognized
ratably over the hosting periods in accordance with EITF issue 00-3.
The Company generates non-recurring revenue from the licensing of its
software. The Company follows the provisions of AICPA Statements of Position
("SOP") 97-2 "Software Revenue Recognition," SOP 98-4 "Deferral of the Effective
Date of Certain Provisions of SOP 97-2", and SOP 98-9 "Modification of SOP 97-2,
Software Revenue Recognition, With Respect of Certain Transactions". Software
license revenue is recognized upon the execution of a license agreement, when
the licensed product has been delivered, fees are fixed and determinable,
collectibility is probable and when all other significant obligations have been
fulfilled. For software license agreements in which customer acceptance is a
condition of earning the license fees, revenue is not recognized until
acceptance occurs. For arrangements containing multiple elements, such as
software license fees, consulting services and maintenance, and where
vendor-specific objective evidence ("VSOE") of fair value exists for all
undelivered elements, the Company accounts for the delivered elements in
accordance with the "residual method" prescribed by SOP 98-9. For arrangements
in which VSOE does not exist for each element, including specified upgrades,
revenue is deferred and not recognized until delivery of the element without
VSOE has occurred. The Company also generates non-recurring revenue from
consulting fees for implementation, installation, data conversion, and training
related to the use of the Company's proprietary and third-party licensed
products. The Company recognizes revenues for these services as they are
performed, as they are principally contracted for on a time and material basis.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred.
SOFTWARE DEVELOPMENT COSTS
Software development costs for new software and for enhancements to
existing software are expensed as incurred until the establishment of
technological feasibility. Software development costs incurred subsequent to the
establishment of technological feasibility and prior to general release of the
product are capitalized as capitalized software products and amortized to cost
of
F-11
60
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
revenues on a straight-line basis over the estimated useful life of the related
products, generally five years. Amortization expense for the years ended
December 31, 2000, 1999 and 1998 was $9,000, zero and zero, respectively, and is
included in cost of revenues.
INCOME TAXES
The Company accounts for income taxes under the liability method. Under
this method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. A valuation allowance is
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
F-12
61
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPUTATION OF INCOME (LOSS) PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income (loss)
by the weighted average number of common shares outstanding for the period.
Common shares issued in connection with business combinations, that are held in
escrow, are excluded from the computation of basic EPS until the shares are
released from escrow. Diluted EPS reflects the potential dilution that could
occur from common shares issuable through stock options, warrants, shares held
in escrow and other convertible securities. The following is a reconciliation of
the numerator (net income (loss)) and the denominator (number of shares) used in
the basic and diluted EPS calculations (in thousands, except per share data):
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- ------- -------
BASIC:
Net income (loss)................................... $(42,258) $(7,927) $ 60
-------- ------- -------
Weighted average common shares outstanding.......... 23,444 9,376 4,937
-------- ------- -------
Net income (loss) per share......................... $ (1.80) $ (0.85) $ 0.01
======== ======= =======
DILUTED:
Net income (loss)................................... $(42,258) $(7,927) $ 60
-------- ------- -------
Weighted average common shares outstanding.......... 23,444 9,376 4,937
Preferred stock..................................... -- -- 2,888
Options to purchase common stock.................... -- -- 305
Common stock subject to repurchase.................. -- -- 4,640
Warrants............................................ -- -- 13
-------- ------- -------
Total weighted common stock and common stock
equivalents...................................... 23,444 9,376 12,783
-------- ------- -------
Net income (loss) per share......................... $ (1.80) $ (0.85) $ 0.00
======== ======= =======
Because their effects are anti-dilutive, diluted EPS excludes the following
potential common shares:
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- ------- -------
Shares held in escrow............................. 686 518 --
Options to purchase common stock.................. 5,170 3,479 --
Unvested portion of restricted stock.............. 325 -- --
Common stock subject to repurchase................ -- 1,698 --
Warrants.......................................... 300 -- --
-------- ------- -------
6,481 5,695 --
======== ======= =======
F-13
62
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPREHENSIVE INCOME
The Company has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Comprehensive Income." SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
for general-purpose financial statements. Comprehensive income (loss) is defined
as net income (loss) plus all revenues, expenses, gains and losses from
non-owner sources that are excluded from net income (loss) in accordance with
generally accepted accounting principles.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133, as amended by SFAS 137 and SFAS
138, establishes methods of accounting and reporting for derivative instruments
and hedging activities and is effective for all fiscal quarters for all fiscal
years beginning after June 15, 2000. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The implementation of SFAS
133 will not have a material impact on the Company's financial statements.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 2000
presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment, net, consists of the following:
DECEMBER 31,
--------------------
2000 1999
------- -------
(IN THOUSANDS)
PROPERTY AND EQUIPMENT
Computer equipment........................................ $16,198 $ 7,166
Furniture and fixtures.................................... 4,197 1,607
Equipment................................................. 2,026 841
Software.................................................. 6,331 2,401
Leasehold improvements.................................... 2,838 187
------- -------
31,590 12,202
Less: Accumulated depreciation.............................. (5,967) (1,405)
------- -------
$25,623 $10,797
======= =======
Depreciation expense for the years ended December 31, 2000, 1999 and 1998
was $4.6 million, $1.1 million and $118,000, respectively. Included in property
and equipment at December 31, 2000 and December 31, 1999 is equipment acquired
under capital leases totaling approximately $10.0 million and $4.1 million,
respectively, and related accumulated depreciation of $3.0 million and $538,000,
respectively.
F-14
63
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets, net, consist of the following:
DECEMBER 31,
-------------------
2000 1999
-------- -------
(IN THOUSANDS)
INTANGIBLE ASSETS
Goodwill.................................................. $180,075 $ 8,272
Acquired workforce........................................ 19,319 1,687
Customer lists............................................ 37,961 4,184
Core technology........................................... 52,713 4,527
Software licenses......................................... 2,947 2,707
Trade names............................................... 8,870 --
-------- -------
301,885 21,377
Less: Accumulated amortization.............................. (20,278) (1,051)
-------- -------
$281,607 $20,326
======== =======
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
YEAR ENDED
DECEMBER 31,
-------------------
2000 1999
------- ------
(IN THOUSANDS)
ACCRUED LIABILITIES
Accrued payroll and benefits.............................. $ 8,779 $4,080
Accrued professional fees................................. 966 477
Accrued acquisition expenses.............................. 2,393 2,445
Other..................................................... 7,829 2,170
------- ------
$19,967 $9,172
======= ======
6. NOTES PAYABLE AND LINES OF CREDIT
In September 2000, the Company executed a Secured Term Note facility with a
lending institution for a total available amount of $10.0 million. A total of
$4.0 million was borrowed under a Secured Term Note. The Company subsequently
paid the outstanding balance on its existing line of credit of $2.7 million from
borrowings under the Secured Term Note. The Secured Term Note was due and repaid
by the Company in October 2000, after the acquisition of Erisco was consummated.
In September 2000, the Company also entered into a Loan and Security
Agreement and Revolving Credit Note with the same lender, providing for a
revolving credit facility in the maximum principal amount of $15.0 million. The
revolving credit facility became effective upon repayment of any outstanding
balance on the Secured Term Note. In October and December 2000, the Loan and
Security Agreement and Revolving Credit Note were amended to include Erisco and
RIMS,
F-15
64
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
respectively, as additional borrowers. The revolving credit facility is secured
by all of the Company's receivables and expires in September 2002.
Borrowings under the revolving credit facility are limited to and shall not
exceed 80% of qualified accounts as defined in the Loan and Security Agreement.
Interest on the revolving credit facility is prime plus 1.5%. In addition, there
is a monthly 0.0333% usage fee and a monthly 0.083% loan management fee.
Interest is payable monthly in arrears on the first business day of the month.
The revolving credit facility contains certain covenants that the Company must
adhere to during the term of the agreement, including a tangible net worth, as
defined, of at least $12.0 million and the generation of a minimum monthly net
earnings before interest, depreciation and amortization and minimum cash
balances, as defined in the Loan and Security Agreement. As of December 31,
2000, the Company had outstanding borrowings on the revolving line of credit of
$11.4 million.
In December 1999, the Company entered into a lease line of credit with a
financial institution. This lease line of credit was specifically established to
finance computer equipment purchases. The lease line of credit has a limit of
$2.0 million and expired as scheduled in December 2000. Borrowings under the
lease line of credit at December 31, 2000 totaled approximately $1.5 million and
are collateralized by the assets under lease. In accordance with the terms of
the lease line of credit, the outstanding balance is being repaid in monthly
installments of principal and interest through June 2003.
In January 1999, the Company entered into a financing agreement for
$675,000 in order to acquire a software license. The non-interest bearing note
(imputed interest rate of 7.80%) is due in sixty equal monthly installments.
Borrowings under the financing agreement are collateralized by the software that
the Company purchased with the note proceeds. At December 31, 2000, there was
approximately $369,000 principal balance remaining on the note.
In connection with the acquisition of Creative Business Solutions, Inc. and
HealthWeb Systems, Ltd. in February 1999 (Note 12), the Company issued notes of
$270,000. The notes bear interest at 8.00% per annum and the interest is payable
annually in arrears. Fifty percent of the principal balance is payable on the
first anniversary and fifty percent is payable on the second anniversary of the
issue date. At December 31, 2000, there was $135,000 principal balance remaining
on the notes.
In May 1999, the Company entered into a financing agreement for
approximately $1.1 million. The amount is due in twelve equal monthly
installments and bears interest at 10% per annum. Borrowings under the financing
agreement are collateralized by the license that the Company purchased from the
lender. At December 31, 1999, there was $386,000 principal balance remaining on
the note. The debt was paid in full in April 2000.
In March 1999, the Company entered into a revolving line of credit
agreement with a financial institution. In October 1999, the Company entered
into a subsequent agreement which increased the amount available under the line
of credit. The line of credit has a total capacity of $3.0 million and expires
in December 2001. Borrowings under the line of credit bear interest at prime
plus 0.50% and are collateralized by corresponding cash balances on deposit
classified as restricted cash on balance sheet. Interest is payable monthly as
it accrues. The line of credit agreement contains covenants that the Company
must adhere to during the term of the agreement including restrictions on the
payment of dividends. As of December 31, 2000, there were no outstanding
borrowings on the line of credit. The Company has outstanding seven standby
letters of credit in the aggregate amount of $1.5 million which serve as
security deposits for the Company's capital leases. The Company is required to
maintain a cash balance equal to the outstanding letters of credit, which is
classified as restricted cash on the balance sheet.
F-16
65
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Notes payable and lines of credit consist of the following at December 31:
NOTES PAYABLE LINES OF CREDIT
--------------- -----------------
2000 1999 2000 1999
----- ------ -------- -----
Revolving credit facility of $15.0 million,
interest at prime plus 1.5% (11.0% at December
31, 2000), payable monthly in arrears......... $ -- $ -- $ 11,438 $ --
Equipment lease line of credit, secured by
equipment, due in monthly installments through
June 2003, with interest rates between 9.72%
and 10.18%.................................... -- -- 1,524 973
Financing agreement, collateralized by software
license purchased (imputed interest rate of
7.80%) due in equal monthly installments
through January 2004.......................... 369 471
Related party note issued in connection with the
acquisition of CBS and HealthWeb, due in
February 2001, interest at 8%, payable
annually in arrears........................... 135 270
Note payable to lending institution,
collateralized by license purchased, due in
equal monthly installments, interest at 10%
per annum..................................... -- 386
Other obligations due in monthly installments
through October 2002, with interest rates up
to prime plus 1.5% (11.0% at December 31,
2000)......................................... 103 --
----- ------ -------- -----
Total notes payable and lines of credit......... 607 1,127 12,962 973
Less: Current portion........................... (343) (623) (12,089) (293)
----- ------ -------- -----
$ 264 $ 504 $ 873 $ 680
===== ====== ======== =====
Future principal payments of notes payable at December 31, 2000 are as
follows:
FOR THE PERIODS ENDING DECEMBER 31, NOTES PAYABLE LINES OF CREDIT
----------------------------------- ------------- ---------------
2001................................................ $ 343 $ 12,089
2002................................................ 124 718
2003................................................ 129 155
2004................................................ 11 --
2005................................................ -- --
----- --------
607 12,962
Less: Current portion.................................... (343) (12,089)
----- --------
$ 264 $ 873
===== ========
F-17
66
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTIONS
In September 1997, the Company entered into a $520,000 financing agreement,
bearing interest at 9% and payable quarterly beginning January 1, 1998. A member
of the Company's Board of Directors owns 50% of the financing company. The
principal amount was due October 1, 2002. In connection with the financing
agreement, the Company issued to the financing company warrants to purchase
162,595 shares of common stock with an exercise price of $0.80 per share (Note
9). In August 1999, the warrant to purchase 162,595 shares of common stock was
exercised. The exercise price was applied to the principal under the financing
agreement, reducing the principal amount by $130,000. In October 1999, the
Company paid off the remaining principal balance of $390,000.
The Company has a note receivable from an officer of the Company. The note
accrues interest at 6.5% per annum. The principal and accrued interest will be
forgiven annually over a four year period beginning April 30, 1999 provided the
officer is an employee of the Company. In the event of termination of the
officer's employment with the Company the note and accrued interest become due
and payable immediately. At December 31, 2000, the note receivable from related
party was $50,000.
In June 1998 and October 1998, the Company issued full recourse promissory
notes to certain officers for $200,000 and $500,000, respectively. The
promissory notes were collateralized by 200,000 and 362,319 shares,
respectively, of common stock, bore annual interest at 8% and were payable in
1999, or earlier upon employee termination. In May and June 1999, the Company
repurchased the common stock in exchange for the notes.
In June 1999, the Company entered into an agreement with Garte &
Associates, Inc. pursuant to which the Company would pay Garte & Associates,
Inc. an investment banking fee for certain acquisitions. Harvey Garte, the
Company's Vice President of Corporate Development, is the sole stockholder of
Garte & Associates, Inc. In 1999, the Company paid a total of $256,000 to Garte
& Associates, Inc. in connection with the Company's acquisitions of Novalis
Corporation in November 1999 and Finserv Health Care Systems, Inc. in December
1999. In 2000, the Company paid or accrued a total of $615,000 to Garte &
Associates, Inc. in connection with the Company's acquisitions of Healthcare
Media Enterprises, Inc. in January 2000, Erisco Managed Care Technologies, Inc.
in October 2000 and Resource Information Management Systems, Inc. in December
2000.
In November 1999, in connection with the acquisition of Novalis
Corporation, the Company received notes receivable in the aggregate amount of
$475,000 from the eight former stockholders of Novalis. The notes represent the
former stockholders' agreement to repay all legal, financial and accounting fees
and expenses incurred in connection with the acquisition. The notes accrue
interest at 8.0% per annum and are payable one year from the date of
acquisition, which has been extended by the Company. At December 31, 2000, the
notes receivable from related parties was $252,000.
8. COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under noncancelable operating
and capital leases, respectively, with various expiration dates through 2009.
Capital lease obligations are collateralized by the equipment subject to the
leases. The Company is responsible for maintenance costs and property taxes on
certain of the operating leases. Rent expense for the years ended December 31,
2000, 1999 and 1998 was $4.0 million, $1.2 million and $192,000 respectively.
These amounts are net of sublease income of $78,000, $25,000 and $48,000,
respectively.
F-18
67
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payments under noncancelable operating and capital
leases at December 31, 2000 are as follows:
FOR THE PERIODS ENDING DECEMBER 31, CAPITAL LEASES OPERATING LEASES
----------------------------------- -------------- ----------------
(IN THOUSANDS)
2001...................................... $ 2,523 $ 7,240
2002...................................... 1,840 6,973
2003...................................... 1,146 6,483
2004...................................... 450 4,808
2005...................................... 159 3,967
Thereafter................................ -- 6,967
------- -------
Total minimum lease payments................... 6,118 $36,438
=======
Less: Interest................................. (692)
Less: Current portion.......................... (2,123)
-------
$ 3,303
=======
In May 2000, Finserv Health Care Systems, Inc. ("Finserv"), a wholly owned
subsidiary of the Company, initiated litigation against U.S. Imaging, Inc.
("USI") for breach of contract. Finserv claims that USI failed to pay fees and
expenses in the amount of approximately $194,000 and that USI wrongfully and
unilaterally terminated the contracts in February 2000, before the end of the
term and therefore is liable for a termination fee of $250,000. Also, Finserv
alleges that USI has continued to use Finserv's proprietary software after the
wrongful termination of the contracts and that USI is liable for the economic
damages suffered by Finserv as a result of this unauthorized use. The amount of
damages, if any, remains unknown. USI has filed a counterclaim against Finserv
for breach of contract, alleging that USI sustained damages in excess of
$450,000 as Finserv failed to provide a variety of services within the
contracts' scope. In addition, USI has claimed additional damages of
approximately $2.0 million as a result of Finserv's breach of an obligation to
file certain claims on USI's behalf in the bankruptcy of Dow Corning
Corporation. The litigation is set for trial on April 23, 2001, but the parties
have requested a continuance until after October 15, 2001. The Company is unable
to estimate the range of possible loss, if any, from this litigation, and no
accrual for any loss related to this matter has been made in the consolidated
financial statements.
In December 2000, the Company received notice from a third party through
its legal counsel, that the Company is allegedly infringing on the third party's
trademark. No damages have been specified. The Company is unable to estimate the
range of possible loss, if any, from this litigation, and no accrual for any
loss related to this matter has been made in the consolidated financial
statements.
In the opinion of management, the results of the above matters,
individually or in the aggregate, are not expected to have a material effect on
the Company's results of operations, financial condition or cash flows.
F-19
68
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY
COMMON STOCK
In October 1999, the Company completed its initial public offering of
4,480,000 shares of common stock, including 630,000 shares issued in connection
with the exercise of the underwriters' over-allotment option, at a price of
$9.00 per share, that raised approximately $36.0 million, net of underwriting
discounts, commissions and other offering costs totaling approximately $4.3
million. In addition, in connection with the offering, 350,000 shares of common
stock of the Company were sold by a selling stockholder at $9.00 per share, for
which the Company received no proceeds. Upon the closing of the offering, all of
the Company's mandatorily redeemable convertible preferred stock converted into
approximately 6,276,000 shares of common stock.
At December 31, 2000, the Company had reserved approximately 7,853,000
shares of common stock for issuance upon exercise of stock options, warrants and
for shares issuable under the Employee Stock Purchase Plan. Common stockholders
are entitled to dividends as and when declared by the Board of Directors subject
to the prior rights of preferred stockholders. The holders of each share of
common stock are entitled to one vote.
STOCK OPTION PLAN
In May 1998, the Company adopted the 1998 Stock Option Plan (the "Plan")
under which the Board of Directors may issue incentive and non-qualified stock
options to employees, directors and consultants. The Board of Directors has the
authority to determine to whom options will be granted, the number of shares,
the term and exercise price. Options are to be granted at an exercise price not
less than fair market value for incentive stock options or 85% of fair market
value for non-qualified stock options. For individuals holding more than 10% of
the voting rights of all classes of stock, the exercise price of incentive stock
options will not be less than 110% of fair market value. The options generally
vest and become exercisable annually at a rate of 25% of the option grant over a
four year period. The term of the options will be no longer than five years for
incentive stock options for which the grantee owns greater than 10% of the
voting power of all classes of stock and no longer than ten years for all other
options.
On November 30, 2000, in connection with the Resource Information
Management Systems, Inc. ("RIMS") acquisition (Note 12), the Company adopted the
RIMS Stock Option Plan based primarily upon RIMS' existing non-statutory stock
option plan. Unless previously terminated by the stockholders the Plan shall
terminate at the close of business on January 1, 2009, and no options shall be
granted under it thereafter. Such termination shall not affect any option
previously granted. Upon a business combination by the Company with any
corporation or other entity, the Company may provide written notice to optionees
that options shall terminate on a date not less than 14 days after the date of
such notice unless theretofore exercised. In connection with such notice, the
Company may, in its discretion, accelerate or waive any deferred exercise
period.
F-20
69
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Activity under the two plans was as follows (in thousands, except per share
data):
OUTSTANDING OPTIONS
SHARES --------------------------- WEIGHTED
AVAILABLE NUMBER OF AGGREGATE AVERAGE
FOR GRANT SHARES EXERCISE PRICE PRICE EXERCISE PRICE
--------- --------- --------------- --------- --------------
Options reserved at
Plan inception....... 1,600 -- -- -- --
Granted................ (1,159) 1,159 $ 0.25 - $ 0.28 $ 297 $ 0.26
Cancelled.............. 10 (10) 0.25 (2) 0.25
------ ----- -------
Balances, December 31,
1998................. 451 1,149 0.25 - 0.28 295 0.26
Additional options
reserved............. 2,400
Granted................ (2,644) 2,644 0.25 - 29.75 16,318 6.17
Exercised.............. -- (60) 0.25 (15) 0.25
Cancelled.............. 254 (254) 0.25 - 20.25 (261) 1.03
------ ----- -------
Balances, December 31,
1999................. 461 3,479 0.25 - 29.75 16,337 4.70
Additional options
reserved............. 3,200 --
Granted................ (2,386) 2,386 12.68 - 63.25 47,735 20.00
Adopted and assumed.... -- 300 7.02 2,107 7.02
Exercised.............. -- (425) 0.25 - 14.50 (312) 0.73
Cancelled.............. 570 (570) 0.25 - 57.50 (7,751) 13.58
------ ----- -------
Balances, December 31,
2000................. 1,845 5,170 $ 0.25 - $63.25 $58,116 $11.24
====== ===== =======
F-21
70
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The options outstanding and currently exercisable by exercise price at
December 31, 2000 are as follows (in thousands, except per share data):
OPTIONS OUTSTANDING AT DECEMBER 31, 2000 OPTIONS EXERCISABLE AT
---------------------------------------------- DECEMBER 31, 2000
WEIGHTED ----------------------------
AVERAGE NUMBER
NUMBER REMAINING WEIGHTED EXERCISABLE WEIGHTED
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE AS OF AVERAGE
EXERCISE PRICE AS OF 12/31/00 LIFE (YEARS) EXERCISE PRICE 12/31/00 EXERCISE PRICE
- -------------- -------------- ------------ -------------- ----------- --------------
$ 0.25 - $ 2.60 1,864 8.00 $ 0.87 456 $ 0.77
$ 6.50 - $ 6.50 280 8.64 6.50 61 6.50
$ 7.02 - $ 7.02 300 8.00 7.02 300 7.02
$12.69 - $15.25 1,979 9.65 14.64 26 14.50
$17.81 - $20.25 332 9.08 19.85 70 20.25
$28.75 - $38.98 268 9.02 31.58 30 28.75
$57.50 - $63.25 147 9.13 58.28 0 0.00
----- ---- ------ --- ------
5,170 8.87 $11.24 943 $ 5.31
===== ==== ====== === ======
STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation." Had compensation cost for the Company's stock
compensation plans been determined based on the fair value at the grant date for
awards during the years ended December 31, 2000, 1999 and 1998 consistent with
the provisions of SFAS No. 123, the Company's net income would have been as
follows (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31,
----------------------------
2000 1999 1998
-------- ------- -----
Net income (loss), as reported........................... $(42,258) $(7,927) $ 60
Net income (loss), pro forma............................. $(48,340) $(8,695) $ 54
Net income (loss) per share, as reported:
Basic.................................................. $ (1.80) $ (0.85) $0.01
Diluted................................................ $ (1.80) $ (0.85) $0.00
Net income (loss) per share, pro forma:
Basic.................................................. $ (2.06) $ (0.93) $0.01
Diluted................................................ $ (2.06) $ (0.93) $0.00
Such pro forma disclosures may not be representative of future pro forma
compensation cost because options vest over several years and additional grants
are anticipated to be made each year.
At December 31, 2000, 1999, and 1998 options exercisable under the Plan
were 943,299, 241,921, and none respectively. The weighted average fair values
of options granted during 2000, 1999 and 1998 were $9.31, $6.45 and $0.05,
respectively.
The fair value of each option granted prior to October 9, 1999, the date of
the Company's initial public offering, was estimated on the date of grant using
the minimum value method. Thereafter, the
F-22
71
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
fair value of option grants were estimated using a Black-Scholes pricing model.
The following weighted average assumptions were used in the estimations:
YEAR ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
------- ------------ -------
Expected volatility................................. 50% 221% --
Risk-free interest rate............................. 6.00% 6.34% 5.18%
Expected life....................................... 4 years 4 years 4 years
Expected dividends.................................. -- -- --
EMPLOYEE STOCK PURCHASE PLAN
In July 1999, the Board of Directors adopted the Employee Stock Purchase
Plan ("Stock Purchase Plan"), which is intended to qualify under Section 423 of
the Internal Revenue Code. A total of 600,000 shares of common stock have been
reserved for issuance under the Stock Purchase Plan, of which 538,476 remain
available for issuance at December 31, 2000. Employees are eligible to
participate if they are employed for at least 20 hours per week and for more
than five months in any calendar year and who have been employed for at least 90
days. Employees who own more than 5% of the Company's outstanding stock may not
participate. The Stock Purchase Plan permits eligible employees to purchase
common stock through payroll deductions, which may not exceed the lesser of 15%
of an employee's compensation or $25,000.
The Stock Purchase Plan was implemented by six month offerings with
purchases occurring at six month intervals commencing January 1, 2000. The
purchase price of the common stock under the Stock Purchase Plan will be equal
to 85% of the fair market value per share of common stock on either the start
date of the offering period or on the purchase date, whichever is less. The
Stock Purchase Plan will terminate in 2009, unless terminated sooner by the
Board of Directors. Shares issued under the Stock Purchase Plan were 61,524 in
2000 at a weighted average purchase price of $13.66 per share.
DEFERRED STOCK COMPENSATION
The Company recorded deferred stock compensation related to stock options
granted to employees where the exercise price is lower than the fair market
value of the Company's common stock on the date of the grant. Total deferred
compensation recorded for these options was $341,000, $6.4 million and $482,000
in 2000, 1999 and 1998, respectively. Additionally, the Company recorded
deferred stock compensation in the amount of $5.1 million related to the
issuance of restricted stock to certain employees of one of its customers in May
2000, and in connection with the acquisitions of Erisco and RIMS in October and
December 2000 -- see "Restricted stock". The Company amortizes the deferred
stock compensation charge over the vesting period of the underlying stock option
or restricted stock award. Amortization of deferred stock compensation expense
was $1.9 million, $1.1 million and $22,000 in 2000, 1999 and 1998, respectively.
WARRANTS
In September 2000, the Company issued warrants to purchase 300,000 shares
of the Company's common stock, at an exercise price of $13.50 per share and, in
return, received warrants to purchase 100,000 shares of common stock of Maxicare
Health Plans, Inc. at an exercise price of $1.50 per share, in connection with
consummation of an Application Services Provider (ASP) agreement. The warrants
were immediately exercisable upon issuance and expire in 2005.
F-23
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THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The values of the warrants issued and received were determined using a Black
Scholes option pricing model with the following assumptions:
WARRANTS WARRANTS
ISSUED RECEIVED
-------- --------
Term....................................................... 5 years 5 years
Expected dividends......................................... -- --
Exercise price............................................. $ 13.50 $ 1.50
Grant date stock price..................................... $ 12.06 $ 1.31
Expected volatility........................................ 50% 53%
Risk-free interest rate.................................... 5.91% 5.91%
The $1,716,000 net value of the warrants exchanged is being amortized on a
straight-line basis over the agreement term as a reduction of recurring revenue.
A total of $61,000 was charged against recurring revenue in the year ended
December 31, 2000.
As of December 31, 2000, the Company has reserved 300,000 shares of its
common stock for the exercise of these warrants.
In connection with the October 1997 acquisition of Croghan & Associates,
the Company issued a warrant to purchase 162,595 shares of the Company's common
stock at an exercise price of $0.80 per share to replace an existing warrant to
purchase Croghan & Associates stock. The value of the warrant determined using
the Black Scholes model was not material. In August 1999, the warrant to
purchase 162,595 shares of common stock was exercised.
SHAREHOLDER RIGHTS PLAN
In September 2000, the Company's Board of Directors adopted a shareholder
rights plan. The plan provides for a dividend distribution of one preferred
stock purchase right (a "Right") for each outstanding share of common stock,
distributed to stockholders of record on or after October 19, 2000. The Rights
will be exercisable only if a person or group acquires 15% or more of the
Company's common stock (an "Acquiring Person") or announces a tender offer for
15% or more of the common stock. Each Right will entitle stockholders to buy one
one-hundredth of a share of newly created Series A Junior Participating
Preferred Stock, par value $0.001 per share, of the Company at an initial
exercise price of $75 per Right, subject to adjustment from time to time.
However, if any person becomes an Acquiring Person, each Right will then entitle
its holder (other than the Acquiring Person) to purchase at the exercise price,
common stock of the Company having a market value at that time of twice the
Right's exercise price. If the Company is later acquired in a merger or similar
transaction, all holders of Rights (other than the Acquiring Person) may, for
$75.00, purchase shares of the acquiring corporation with a market value of
$150.00. Rights held by the Acquiring Person will become void. The Rights Plan
excludes from its operation IMS Health Incorporated (Note 12), and as a result,
their holdings will not cause the Rights to become exercisable or nonredeemable
or trigger the other features of the Rights. The Rights will expire on October
2, 2010, unless earlier redeemed by the Board at $0.001 per Right.
The holders of Series A Junior Participating Preferred Stock in preference
to the holders of common stock, shall be entitled to receive, when, as and if
declared by the Board of Directors, quarterly dividends payable in cash in an
amount per share equal to 100 times the aggregate per share amount of all cash
dividends or non-cash dividends other than a dividend payable in share of common
stock.
Each share of Series A Junior Participating Preferred Stock shall entitle
its holder to 100 votes.
F-24
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THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RESTRICTED STOCK
In May 2000, the Company issued 13,700 shares of restricted stock pursuant
to restricted stock agreements with non-employees. Pursuant to the agreements,
the Company shall cancel any unvested shares of common stock upon termination of
services. Shares subject to the agreements vest over a four-year period, in
equal annual installments, commencing on the first anniversary of the agreement
date. The fair value of the restricted stock is determined based on a
Black-Scholes pricing model at each reporting period. As of December 31, 2000,
the Company cancelled 2,400 shares of unvested common stock upon termination of
services. The unvested shares of common stock vest immediately prior to a change
in control of the Company unless the Board of Directors determines otherwise.
In October 2000, in connection with the acquisition of Erisco Managed Care
Technologies, Inc. ("Erisco"), the Company issued 231,404 shares of restricted
stock to certain employees of Erisco. In addition, the Company recorded a $3.5
million charge to deferred stock compensation. 115,702 of the shares subject to
the agreement vest over a three-year period, in equal annual installments,
commencing on the first anniversary of the agreement date, as long as the
individual remains employed by the Company. The remaining 115,702 shares vest
over a three-year period commencing on December 31, 2001 if certain revenue and
operating income goals are achieved for the prior year. The unvested shares of
common stock vest immediately prior to a change in control of the Company unless
the Board of Directors determines otherwise.
In December 2000, in connection with the acquisition of Resource
Information Management Systems, Inc. ("RIMS"), the Company issued 82,553 shares
of restricted stock to certain employees of RIMS. In addition, the Company
recorded a $1.4 million charge to deferred stock compensation. Shares subject to
the agreement vest over a three-year period, in equal annual installments,
commencing on the first anniversary of the agreement date, as long as the
individual remains employed by the Company. The unvested shares of common stock
vest immediately prior to a change in control of the Company unless the Board of
Directors determines otherwise.
10. INCOME TAXES
The provision for (benefit of) income taxes consists of the following:
YEAR ENDED DECEMBER 31,
------------------------
2000 1999 1998
------- ----- ----
(IN THOUSANDS)
Current
Federal................................................... $ (242) $ (48) $143
State..................................................... 30 22 22
------- ----- ----
(212) (26) 165
------- ----- ----
Deferred
Federal................................................... (4,989) (164) (71)
State..................................................... (647) (23) (12)
------- ----- ----
(5,636) (187) (83)
------- ----- ----
Total income tax provision (benefit).............. $(5,848) $(213) $ 82
======= ===== ====
F-25
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THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's effective tax rate differs from the statutory rate as shown
in the following schedule:
YEAR ENDED DECEMBER 31,
---------------------------
2000 1999 1998
-------- ------- ----
(IN THOUSANDS)
Tax provision (benefit) at federal statutory rate......... $(16,356) $(2,768) $48
State income taxes, net of federal benefit................ (2,405) (385) 7
Increase in valuation allowance........................... 7,343 1,408 --
Goodwill amortization..................................... 3,434 699 --
Amortization of deferred stock compensation............... 657 412 --
Write off of acquired in-process technology............... 485 478 --
Other..................................................... 994 (57) 27
-------- ------- ---
Tax provision (benefit)................................... $ (5,848) $ (213) $82
======== ======= ===
Temporary differences which gave rise to significant portions of deferred
tax assets and liabilities are as follows (in thousands):
YEAR ENDED
DECEMBER 31,
-------------------
2000 1999
-------- -------
Deferred tax assets:
Net operating loss carryforwards.......................... $ 16,246 $ 5,381
Reserves and accruals..................................... 2,096 425
Deferred revenue.......................................... 578 --
Research credits.......................................... 36 36
-------- -------
Deferred tax assets......................................... 18,956 5,842
-------- -------
Deferred tax liabilities:
Deferred revenue.......................................... -- --
Fixed assets.............................................. -- (446)
Leases.................................................... (554) --
Depreciation.............................................. (461) --
Acquired intangible assets................................ (43,082) (3,895)
Other..................................................... -- (93)
-------- -------
Deferred tax liabilities.................................... (44,097) (4,434)
Valuation allowance......................................... -- (1,408)
-------- -------
Net deferred taxes.......................................... $(25,141) $ --
======== =======
Tax loss carryforwards at December 31, 2000 are approximately $27.2 million
for federal purposes. The federal loss carryforward will start to expire in the
year ended 2019. The ownership change provisions of the Internal Revenue Code of
1986 limit the availability of a portion of the net operating loss
carryforwards. The annual limitation may result in the expiration of net
operating losses before utilization.
F-26
75
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During 2000, the valuation allowance increased by $7.3 million due to the
generation of deferred tax assets and subsequently decreased to zero due to the
Company's use of the valuation allowance to offset deferred liabilities
resulting from its acquisitions.
11. EMPLOYEE BENEFIT PLAN
In January 1998, the Company adopted a defined contribution plan (the "401k
Plan") which qualifies under Section 401(k) of the Internal Revenue Code of
1986. Eligible employees may make voluntary contributions to the 401k Plan of up
to 15% of their annual compensation, not to exceed the statutory amount, and the
Company may make matching contributions. The Company has made no contributions
since the 401k Plan's inception.
12. ACQUISITIONS
CREATIVE BUSINESS SOLUTIONS, INC.
In February 1999, the Company acquired all of the outstanding shares of
Creative Business Solutions, Inc. ("Creative Business Solutions"), an Internet
solutions development company specializing in the integration of healthcare
information technology and contract programming solutions, and its majority
owned subsidiary, HealthWeb Systems, Ltd. ("HealthWeb"), an Internet software
and portal development company specializing in customized healthcare
applications. The Company also acquired the remaining minority interest in
HealthWeb. The acquisitions were accounted for using the purchase method of
accounting and accordingly, the purchase price was allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their
estimated fair values on the acquisition date.
The purchase price of approximately $3.3 million consisted of approximately
$1.4 million in cash, 655,000 shares of common stock, notes payable of $270,000,
assumed liabilities of $527,000 and acquisition costs of approximately $100,000.
Included in the 655,000 shares of common stock issued in the acquisition were
131,000 shares held in escrow to secure indemnification obligations of the
Creative Business Solutions and HealthWeb shareholders to indemnify the Company
for any breach of warranty, any inaccuracy of any representation made by the
seller or any breach of any covenant in the purchase agreement. Such shares were
released from escrow in February 2001. The fair value of the 655,000 shares of
common stock issued in the acquisition was determined to be $1.1 million. The
excess of the purchase price over the fair market value of the net tangible
assets acquired aggregated approximately $2.5 million, of which $484,000 was
allocated to acquired in-process technology and $2.1 million was allocated to
goodwill, acquired workforce and customer list. An independent valuation was
performed to determine the fair value of the identifiable intangible assets,
including the portion of the purchase price attributed to the acquired
in-process technology. At the date of acquisition, the Company determined the
technological feasibility of HealthWeb's product was not established, and
accordingly, wrote off the corresponding amount based on the percentage of
completion at the acquisition date to acquired in-process technology.
Approximately $650,000 in research and development had been spent by HealthWeb
up to the date of the acquisition in an effort to develop the technology to
produce a commercially viable product and to develop future releases with
additional functionality, and the Company expected to introduce the final
product by the end of 1999. The actual expense associated with the research and
development of the HealthWeb product from the date of the acquisition through
the end of 1999, when the product was released, was approximately $936,000.
F-27
76
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MANAGEMENT AND TECHNOLOGY SOLUTIONS, INC.
In April 1999, the Company acquired certain assets and liabilities from
Management and Technology Solutions, Inc. ("MTS") in exchange for 60,000 shares
of common stock. The acquisition was accounted for as a purchase. The assets
included property and equipment, intellectual property, trademarks and licenses,
and computer software and software licenses. As part of this transaction, the
Company assumed liabilities consisting of lease obligations, a note payable and
certain other accrued liabilities.
NOVALIS CORPORATION
In November 1999, the Company acquired all the outstanding shares of the
Novalis Corporation ("Novalis"). The purchase price of approximately $18.2
million consisted of cash in the amount of approximately $5.0 million, 549,786
shares of common stock with a value of $16.37 per share, assumed liabilities of
$1.9 million and acquisition costs of approximately $2.3 million. Of the 549,786
shares of common stock which have been issued in connection with this
acquisition, 366,524 shares of the common stock were held in escrow until
November 2000, to indemnify the Company for any breach of warranty, any
inaccuracy of any representation made by the seller or any breach of any
covenant in the purchase agreement. At the expiration of the escrow period,
114,223 of the shares were returned to the Company and cancelled to satisfy a
receivable from a former Novalis customer, and the balance of the escrow shares
were released to the sellers.
The acquisition of Novalis was accounted for using the purchase method of
accounting. The excess of the purchase price over the estimated fair values of
the assets purchased and liabilities assumed was $13.2 million, of which
$923,000 was allocated to acquired in-process technology, and was written off in
the year ended December 31, 1999, and $12.3 million was allocated to goodwill
and intangible assets consisting of assembled workforce, core technology and
customer lists. As of the acquisition date, Novalis was developing several
enhancements to its proprietary software products which include claims
processing, data warehouse, medical management, credentialing and data
processing softwares. At the date of the acquisition, the Company determined the
technological feasibility of these product enhancements was not established and
there was no alternative use and accordingly, wrote off the corresponding amount
based on the percentage of completion at the acquisition date to acquired
in-process technology. Approximately $535,000 in research and development had
been spent by Novalis up to the date of the acquisition in an effort to develop
the next releases of the in-process and core technology. The future research and
development expense associated with the in-process and core technology was
estimated to be approximately $490,000. The in-process and core technology was
scheduled to be released by June 30, 2000. The actual expense associated with
research and development of the next releases of these products was
approximately $486,000 and the various product release dates ranged between
March 1, 2000 and May 31, 2000.
FINSERV HEALTH CARE SYSTEMS, INC.
In December 1999, the Company acquired all of the outstanding shares of
Finserv Health Care Systems, Inc. ("Finserv"). Finserv is a billing and accounts
receivable management company focusing on the outpatient sector of the
healthcare industry. The purchase price of approximately $5.8 million consisted
of cash in the amount of approximately $1.8 million, 48,998 shares of common
stock with a value of $30.61 per share, assumed liabilities of $1.5 million, and
acquisition costs of approximately $1.0 million. The agreement also provides
that an additional amount of shares, up to $750,000 in common shares (the
"earnout consideration"), may be issued to the Finserv selling securityholders
if certain milestones are achieved in the amount of up to $375,000 for each of
the
F-28
77
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
years ending December 31, 2000 and 2001. The milestones were not achieved in
2000. As a result, the total of the potential milestone payment is reduced to up
to $375,000 in common shares. Of the 48,998 shares of common stock which have
been issued in connection with this acquisition, 20,000 shares of common stock
are held in escrow to indemnify the Company for any breach of warranty, any
inaccuracy of any representation made by the seller or any breach of any
covenant in the purchase agreement.
The acquisition was accounted for using the purchase method of accounting
and accordingly, the purchase price was allocated to the tangible and intangible
assets acquired and liabilities assumed on the basis of their estimated fair
values on the acquisition date. The excess of the purchase price over the
estimated fair value of the assets purchased and liabilities assumed was $4.7
million and was allocated to goodwill.
HEALTHCARE MEDIA ENTERPRISES, INC.
In January 2000, the Company acquired all of the outstanding shares of
Healthcare Media Enterprises, Inc. ("HME"). HME's primary business focus is on
software development, especially relating to the Internet, web design, and
business to business portals. The purchase price of approximately $7.2 million
consisted of cash in the amount of approximately $1.4 million, 87,359 shares of
common stock with a value of $38.66 per share, assumed liabilities of $191,000
and acquisition costs of approximately $266,000. In December 2000, an additional
91,954 contingent shares of common stock with a value of $17.04 were issued upon
the achievement of certain milestones in accordance with the original purchase
agreement which resulted in an increase to goodwill of approximately $1.6
million. An additional 44,047 contingent shares of common stock were issued in
accordance with a market value guarantee which did not effect the purchase price
or goodwill. In January 2001, an additional 11,687 contingent shares of common
stock with a value of $16.06 were issued in accordance with certain revenue
commitment guarantees in the original purchase agreement. Of the 87,359 shares
of common stock which were issued in connection with this acquisition, 17,472
shares of common stock were held in escrow to indemnify the Company for any
breach of warranty, any inaccuracy of any representation made by the seller or
any breach of any covenant in the purchase agreement, until they were released
to the seller in January 2001.
The acquisition of HME was accounted for using the purchase method of
accounting. The excess of the purchase price over the fair market value of the
assets purchased and liabilities assumed was $6.8 million, of which $536,000 was
allocated to acquired in-process technology, based upon an independent
appraisal, and was expensed in January 2000, and $6.3 million was allocated to
goodwill and intangible assets consisting of assembled workforce, core
technology and customer lists. As of the acquisition date, HME was developing
several enhancements to its proprietary software products for which
technological feasibility had not been established and for which there were no
alternative uses. Accordingly, the Company expensed the portion of the
consideration allocated to in-process technology. Approximately $1.4 million in
research and development had been spent up to the date of the acquisition in an
effort to develop the next releases of the in-process technology. The future
research and development expense associated with the in-process technology was
estimated to be approximately $350,000, and the in-process technology was
scheduled to be released by September 2000. Since the date of acquisition, the
Company has decided to postpone the release of the in-process technology, and
has incurred no further research and development expense related to the product.
In valuing HME's developed, in-process and core technologies, the Company
utilized the discounted cash flows method. The discounted cash flows method
includes an analysis of the completion costs, cash flows and risks associated
with achieving such cash flows. This income
F-29
78
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
stream was tax effected and discounted to its present value to estimate the
value of the core and in-process technologies. For purposes of this analysis,
the Company used 20% and 25% discount rates for the core and in-process
technologies, respectively. These discount rates are consistent with the risks
inherent in achieving the projected cash flows. The amount allocated to
in-process technology was determined by establishing the stage of completion of
the in-process research and development project at the date of acquisition.
ERISCO MANAGED CARE TECHNOLOGIES, INC.
In May 2000, the Company entered into an Agreement and Plan of
Reorganization with Elbejay Acquisition Corp. ("Elbejay") a wholly owned
subsidiary of the Company, IMS Health Incorporated ("IMS HEALTH"), and Erisco
Managed Care Technologies, Inc. ("Erisco") pursuant to which Elbejay would merge
with and into Erisco resulting in Erisco becoming a wholly owned subsidiary of
the Company. In October 2000, the Company consummated the transaction, and
Erisco became a wholly owned subsidiary of the Company. Erisco is a leading
provider of software to the managed care industry. The purchase price of
approximately $228.7 million consisted of 12,142,857 shares of common stock with
a value of $15.89 per share, assumed liabilities of $30.0 million, which
includes $14.2 million of deferred tax liability resulting from the difference
between the book and tax basis of the intangible assets arising as a result of
the acquisition and acquisition costs of approximately $5.8 million. In
addition, the Company issued 231,404 shares of restricted stock to certain
Erisco employees.
The acquisition was accounted for using the purchase method of accounting
and accordingly, the purchase price was allocated to the tangible and intangible
assets acquired and liabilities assumed on the basis of their estimated fair
market values on the acquisition date. The excess of the purchase price over the
estimated fair market value of the assets purchased and liabilities assumed was
$188.1 million and was allocated to goodwill and intangible assets consisting of
assembled workforce, core technology, trademarks and customer lists.
RESOURCE INFORMATION MANAGEMENT SYSTEMS, INC.
On December 1, 2000, the Company acquired all of the issued and outstanding
capital stock of Resource Information Management Systems, Inc., an Illinois
corporation ("RIMS"), in accordance with the terms and conditions of the
Agreement and Plan of Merger, dated as of November 2, 2000 (the "Merger
Agreement") by and among TriZetto, Cidadaw Acquisition Corp., a Delaware
corporation and wholly owned subsidiary of TriZetto, RIMS, the shareholders of
RIMS, and Terry L. Kirch and Thomas H. Heimsoth, and the First Amendment to
Agreement and Plan of Merger, dated as of December 1, 2000 (the "First
Amendment"), by and among TriZetto, Cidadaw Acquisition Corp., RIMS, the
shareholders of RIMS, and Terry L. Kirch and Thomas H. Heimsoth. The acquisition
was effected by a merger (the "Merger") of Cidadaw Acquisition Corp. with and
into RIMS, with RIMS surviving the merger as a wholly owned subsidiary of
TriZetto.
The purchase price of approximately $99.3 million consisted of cash in the
amount of $3.0 million, 2,588,427 shares of common stock with a value of $21.20
per share, the fair value of approximately 300,000 fully vested options assumed
of $4.7 million, assumed liabilities of $35.7 million, which includes $16.6
million of deferred tax liability resulting from the difference between the book
and tax basis of the intangible assets arising as a result of the acquisition
and acquisition costs of approximately $1.0 million. In addition, the Company
issued 82,553 shares of restricted stock to certain RIMS employees. Of the
2,588,427 shares of common stock which were issued in connection with this
Merger, 517,685 shares of common stock are held in escrow to indemnify the
Company for any breach of warranty, any inaccuracy of any representation made by
the seller or
F-30
79
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
any breach of any covenant in the purchase agreement, and are scheduled to be
released in December 2001.
According to the terms and conditions of the Merger Agreement, the shares
issued to effect the Merger are subject to lock-up restrictions such that 50% of
the shares are released on the one-year anniversary of the Merger and 12.5% of
the shares are released on the 15-month, 18-month, 21-month and two year
anniversaries of the Merger. If the average closing price of the Company's
common stock for the five trading days proceeding a lock-up release date is less
than $17.50, the Company shall issue an additional number of the Company's
common stock such that the total number of shares eligible for sale on the
lock-up release date (including shares sold prior to such date) has a value
equal to $45,297,466.10 multiplied by the aggregate percentage of shares of the
Company's common stock released as of such date, provided, however, that the
Company in no event, shall be required to issue more than 647,107 additional
shares. No effect has been included in the purchase accounting for the
additional shares which may be issued as a result of this contingency.
The acquisition was accounted for using the purchase method of accounting
and accordingly, the purchase price was allocated to the tangible and intangible
assets acquired and liabilities assumed on the basis of their estimated fair
market values on the acquisition date. The excess of the purchase price over the
estimated fair market value of the assets purchased and liabilities assumed was
$86.2 million, of which $890,000 was allocated to acquired in-process technology
and was expensed in December 2000, and an estimated $85.3 million was allocated
to goodwill and intangible assets consisting of assembled workforce, core
technology and customer lists. Approximately $2.9 million in research and
development had been spent up to the date of acquisition in an effort to develop
the next release of the four products which represented the in-process
technology. The future research and development expense, associated with the
in-process technology was estimated to be approximately $900,000. The four
products which represented the in-process technology were scheduled to be
released by December 2001.
In valuing RIMS' developed, in-process and core technologies, the Company
utilized the discounted cash flows method. The discounted cash flows method
includes an analysis of the completion costs, cash flows and risks associated
with achieving such cash flows. This income stream was tax effected and
discounted to its present value to estimate the value of the cored and
in-process technologies. For purposes of this analysis, the Company used 20% and
25% discount rates for the core and in-process technologies, respectively. These
discount rates are consistent with the risks inherent in achieving the projected
cash flows. The amount allocated to in-process technology was determined by
establishing the stage of completion of the in-process research and development
project as of the date of acquisition.
Upon the closing of the above transaction, the Company became liable for up
to $745,000 related to costs to exit certain activities of the acquired
enterprise. In addition, costs resulting from management's plan to involuntarily
terminate or relocate certain employees of the acquired entity will be finalized
in the quarter ended March 31, 2001. At December 31, 2000, the Company was still
in the process of formulating the details of these costs.
F-31
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THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The purchase price allocations were based on the estimated fair value of
the assets, on the date of purchases as follows (in thousands):
CREATIVE
BUSINESS
SOLUTIONS NOVALIS FINSERV HME ERISCO RIMS
--------- ------- ------- ------ -------- -------
Total current assets........ $ 596 $ 2,612 $ 827 $ 336 $ 36,040 $ 7,048
Property, Plant, equipment
and other noncurrent
assets.................... 175 2,434 276 88 4,523 6,100
Goodwill.................... 1,338 2,807 4,666 5,595 129,578 36,086
Other intangible assets..... 726 9,427 -- 686 58,570 49,210
Acquired in-process
technology................ 484 923 -- 536 -- 890
------ ------- ------ ------ -------- -------
Total purchase price... $3,319 $18,203 $5,769 $7,241 $228,711 $99,334
====== ======= ====== ====== ======== =======
The following unaudited pro forma summary presents the consolidated results
of operations of the Company as if the acquisitions of Novalis, Finserv, HME,
Erisco, and RIMS occurred on January 1, 1999, including giving effect of
amortization of goodwill and other intangibles and the write-off of acquired
in-process technology (in thousands):
YEAR ENDED
DECEMBER 31,
--------------------
2000 1999
-------- --------
Net revenue................................................. $162,233 $151,846
Net loss.................................................... $(73,280) $(74,279)
Net loss per share.......................................... $ (2.09) $ (3.09)
The following unaudited pro forma summary presents the consolidated results
of operations of the Company as if the acquisitions of Creative Business
Solutions, Novalis Corporation and Finserv occurred on January 1, 1998, giving
effect to amortization of goodwill and other intangibles and the write-off of
acquired in-process technology (in thousands):
YEAR ENDED
DECEMBER 31,
--------------------
1999 1998
-------- --------
Net revenue................................................. $ 58,706 $ 39,312
Net loss.................................................... $(15,177) $(10,510)
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisitions had been in effect for the entire period
presented. In addition, they are not intended to be a projection of future
results.
F-32
81
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SUPPLEMENTAL CASH FLOW DISCLOSURES
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------
2000 1999 1998
-------- ------ ----
(IN THOUSANDS)
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION
Cash paid for interest.................................... $ 903 $ 120 $ 59
Cash paid for income taxes................................ 62 42 705
NONCASH INVESTING AND FINANCING ACTIVITIES
Assets acquired through capital lease..................... 3,235 3,550 167
Deferred stock compensation............................... 5,411 6,383 482
Common stock issued for notes receivable.................. -- -- 53
Issuance of notes payable to acquire software and software
licenses................................................ -- 1,690 --
Common stock issued for Creative Business Solutions,
Inc..................................................... -- 1,146 --
Notes payable issued for Creative Business Solutions,
Inc..................................................... -- 270 --
Repurchase of shares in exchange for stockholder notes
receivable.............................................. -- 700 --
Cancellation of Novalis escrowed shares for payment of
notes receivable........................................ 2,206 -- --
Common stock issued to purchase assets of Management and
Technology Solutions, Inc............................... -- 140 --
Exercise of common stock warrants......................... -- 130
Common stock issued to purchase assets of Novalis
Corporation............................................. -- 8,999 --
Common stock issued to purchase assets of Finserv
Healthcare Systems, Inc................................. -- 1,499 --
Issuance of common stock warrants......................... 1,716 -- --
Common stock issued for acquisition of Healthcare Media
Enterprises, Inc........................................ 5,189 -- --
Common stock issued for acquisition of Erisco Managed
Technologies, Inc....................................... 192,923 -- --
Common stock issued for acquisition of Resource
Information Management Systems, Inc..................... 54,864 -- --
Options assumed for acquisition of Resource Management
Information Systems, Inc................................ 4,718 -- --
14. SEGMENT INFORMATION
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 requires enterprises to report
information about operating segments in annual financial statements and selected
information about reportable segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers.
The Company operates in two reportable segments: recurring or multi-year
contractually based revenue, and revenue generated via non-recurring agreements.
The Company's chief operating decision maker evaluates performance and allocates
resources based on gross margin for these
F-33
82
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
segments. The accounting policies of the reportable segments are the same as
those described in the summary of significant accounting policies.
The Company's reportable segments are organized primarily by the nature of
services provided. The reportable segments are managed separately because of the
difference in marketing strategies, customer base and client approach. Financial
information about segments is reported in the consolidated statements of
operations. The Company does not identify assets by business segments.
The Company's assets are all located in the United States, and all sales
were to customers located in the United States.
Recurring and non-recurring revenues by type of similar products and
services are as follows (in thousands):
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
ASP revenue............................................. $54,596 $19,448 $ 5,300
Software maintenance and annual license agreement
revenue............................................... 7,215 -- --
------- ------- -------
Recurring revenue..................................... 61,811 19,448 5,300
------- ------- -------
Consulting revenue...................................... 26,051 13,478 6,131
Software license revenue................................ 1,194 -- --
------- ------- -------
Non-recurring revenue................................. 27,245 13,478 6,131
------- ------- -------
Total revenue........................................... $89,056 $32,926 $11,431
======= ======= =======
F-34
83
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SUBSEQUENT EVENTS (UNAUDITED)
On April 12, 2001, the Company consummated an Agreement and Plan of Merger
("Plan of Merger") among the Company, Imare Acquisition Corp. ("Imare"), a
wholly owned subsidiary of the Company, Trustco Holdings, Inc. ("Trustco"), and
Infotrust Company ("Infotrust"), a wholly owned subsidiary of Trustco, pursuant
to which Imare merged with and into Infotrust resulting in Infotrust becoming a
wholly owned subsidiary of the Company. The purchase price consisted of 923,077
shares of common stock, 138,462 shares of which are held in escrow to indemnify
the Company for any breach of warranty, any inaccuracy of any representation
made by the seller or any breach of any covenant in the purchase agreement, and
are scheduled to be released in April 2002. In the event that the fair market
value of the common stock as of the one-year and two-year anniversaries is less
than $13.00, the Company shall issue additional shares of common stock, not to
exceed an aggregate of 138,462 additional shares, based on the difference
between $13.00 and the fair market value of the Company's common stock on each
anniversary date.
The acquisition will be accounted for using the purchase method of
accounting, and accordingly, the purchase price will be allocated to the
tangible and intangible assets acquired and liabilities assumed on the basis of
their estimated fair values on the acquisition date. The excess of the purchase
price over the estimated fair value of the tangible and intangible assets
purchased and liabilities assumed will be allocated to goodwill upon completion
of a independent valuation of the intangible assets.
In April 2001, the Board of Directors approved an increase of 1,800,000
shares available for grant under the Plan. Such increase was approved by the
stockholders at the Company's annual meeting held on May 16, 2001.
In April 2001, the Company was served with a lawsuit alleging federal
trademark infringement, unfair competition, false designation of origin,
dilution, and state law claims for trademark infringement and unfair competition
against the Company (see Note 8). The basis of the complaint is the plaintiff's
contention that the Company's use of the trademark "HealtheWare" infringes
plaintiff's alleged trademark "HEALTHware". No damages have been specified. No
discovery has yet been conducted. The Company intends to vigorously defend the
action, including asserting all appropriate counterclaims, and to oppose the
plaintiff's application to register the "HEALTHware" mark in the United States
Patent and Trademark Office. The Company is unable to estimate the range of
possible loss, if any, from this litigation, and no accrual for any loss related
to this matter has been made in the consolidated financial statements.
F-35
84
SCHEDULE II
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT ADDITIONS
BEGINNING CHARGED TO COSTS BALANCE AT
OF PERIOD AND EXPENSES DEDUCTIONS ENDING PERIOD
---------- ---------------- ---------- -------------
ALLOWANCE FOR DOUBTFUL
ACCOUNTS
Year Ended December 31,
1998..................... $ 154 $ 203 $ 153(1) $ 204
Year Ended December 31,
1999..................... $ 204 $ 505 $ 112(1) $ 597
Year Ended December 31,
2000..................... $ 597 $1,357 $ 734(1) $1,220
DEFERRED TAX VALUATION
ALLOWANCE
Year Ended December 31,
1998..................... -- -- -- --
Year Ended December 31,
1999..................... -- $1,408 -- $1,408
Year Ended December 31,
2000..................... $1,408 $7,393 $8,751(2) --
- ---------------
(1) Deductions include the write off of uncollectible amounts with respect to
accounts receivable.
(2) Utilization of the deferred tax valuation allowance to offset deferred tax
liabilities generated in the acquisition of ERISCO Managed Care
Technologies, Inc. in 2000.
F-36
85
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
2.1+ Agreement and Plan of Reorganization, dated as of May 16,
2000, by and among TriZetto, Elbejay Acquisition Corp., IMS
Health Incorporated and Erisco Managed Care Technologies,
Inc. (Incorporated by reference to Exhibit 2.1 of TriZetto's
Form 8-K as filed with the SEC on May 19, 2000, File No.
000-27501)
2.2+ Agreement and Plan of Merger, dated as of November 2, 2000,
by and among TriZetto, Cidadaw Acquisition Corp., Resource
Information Management Systems, Inc. ("RIMS"), the
shareholders of RIMS, Terry L. Kirch and Thomas H. Heimsoth
(Incorporated by reference to Exhibit 2.1 of TriZetto's Form
8-K as filed with the SEC on December 18, 2000, File No.
000-27501)
2.3 First Amendment to Agreement and Plan of Merger, dated as of
December 1, 2000, by and among TriZetto, Cidadaw Acquisition
Corp., RIMS, the shareholders of RIMS, Terry L. Kirch and
Thomas H. Heimsoth (Incorporated by reference to Exhibit 2.2
of TriZetto's Form 8-K as filed with the SEC on December 18,
2000, File No. 000-27501)
3.1 Form of Amended and Restated Certificate of Incorporation of
TriZetto, as filed with the Delaware Secretary of State
effective as of October 14, 1999 (Incorporated by reference
to Exhibit 3.2 of TriZetto's Registration Statement on Form
S-1/A, as filed with the SEC on September 14, 1999, File No.
333-84533)
3.2 Certificate of Amendment of Amended and Restated Certificate
of Incorporation of TriZetto, dated October 3, 2000
(Incorporated by reference to Exhibit 3.1 of TriZetto's Form
10-Q as filed with the SEC on November 14, 2000, File No.
000-27501)
3.3 Certificate of Designation of Rights, Preferences and
Privileges of Series A Junior Participating Preferred Stock
of TriZetto, dated October 17, 2000 (Incorporated by
reference to Exhibit 3.2 of TriZetto's Form 10-Q as filed
with the SEC on November 14, 2000, File No. 000-27501)
3.4 Amended and Restated Bylaws of TriZetto effective as of
October 7, 1999 (Incorporated by reference to Exhibit 3.4 of
TriZetto's Registration Statement on Form S-1/A, as filed
with the SEC on August 18, 1999, File No. 333-84533)
4.1 Specimen common stock certificate (Incorporated by reference
to Exhibit 4.1 of TriZetto's Registration Statement on Form
S-1/A as filed with the SEC on September 14, 1999, File No.
333-84533)
4.2 Rights Agreement, dated October 2, 2000, by and between
TriZetto and U.S. Stock Transfer Corporation (Incorporated
by reference to Exhibit 2.1 of TriZetto's Form 8-A12G as
filed with the SEC on October 19, 2000, File No. 000-27501)
10.1* First Amended and Restated 1998 Stock Option Plan
(Incorporated by reference to Exhibit 4.1 of TriZetto's Form
S-8 as filed with the SEC on August 7, 2000, File No.
333-43220)
10.2* Form of 1998 Incentive Stock Option Agreement (Incorporated
by reference to Exhibit 10.2 of TriZetto's Registration
Statement on Form S-1 as filed with the SEC on August 5,
1999, File No. 333-84533)
10.3* Form of 1998 Non-Qualified Stock Option Agreement
(Incorporated by reference to Exhibit 10.3 of TriZetto's
Registration Statement on Form S-1 as filed with the SEC on
August 5, 1999, File No. 333-84533)
10.4* 1999 Employee Stock Purchase Plan (Incorporated by reference
to Exhibit 10.4 of TriZetto's Registration Statement on Form
S-1/A as filed with the SEC on August 18, 1999, File No.
333-84533)
86
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.5* RIMS Stock Option Plan (Incorporated by reference to Exhibit
4.1 of TriZetto's Form S-8 as filed with the SEC on December
21, 2000, File No. 000-27501)
10.6* Employment Agreement, dated April 30, 1998, by and between
TriZetto and Jeffrey H. Margolis (Incorporated by reference
to Exhibit 10.5 of TriZetto's Registration Statement on Form
S-1 as filed with the SEC on August 5, 1999, File No.
333-84533)
10.7 Promissory Note, dated April 30, 1998, by and between
TriZetto and Jeffrey H. Margolis (Incorporated by reference
to Exhibit 10.6 of TriZetto's Registration Statement on Form
S-1 as filed with the SEC on August 5, 1999, File No.
333-84533)
10.8 Form of Indemnification Agreement (Incorporated by reference
to Exhibit 10.7 of TriZetto's Registration Statement on Form
S-1 as filed with the SEC on August 5, 1999, File No.
333-84533)
10.9 Form of Restricted Stock Agreement between TriZetto and
certain consultants and employees (Incorporated by reference
to Exhibit 10.3 of TriZetto's Form 10-Q as filed with the
SEC on August 14, 2000, File No. 000-27501)
10.10* Form of Change of Control Agreement entered into by and
between TriZetto and certain executive officers of TriZetto
effective as of February 18, 2000 (Incorporated by reference
to Exhibit 10.1 of TriZetto's Form 10-Q as filed with the
SEC on May 15, 2000, File No. 000-27501)
10.11 First Amended and Restated Investor Rights Agreement, dated
April 9, 1999 by and among Raymond Croghan, Jeffrey
Margolis, TriZetto, and Series A and Series B Preferred
Stockholders (Incorporated by reference to Exhibit 10.8 of
TriZetto's Registration Statement on Form S-1/A, as filed
with the SEC on August 18, 1999, File No. 333-84533)
10.12 Office Lease Agreement, dated April 26, 1999, between St.
Paul Properties, Inc. and TriZetto (including addendum)
(Incorporated by reference to Exhibit 10.10 of TriZetto's
Registration Statement on Form S-1 as filed with the SEC on
August 5, 1999, File No. 333-84533)
10.13 Sublease Agreement, dated December 18, 1998, between TPI
Petroleum, Inc. and TriZetto (including underlying Office
Lease Agreement by and between St. Paul Properties, Inc. and
Total, Inc.) (Incorporated by reference to Exhibit 10.11 of
TriZetto's Registration Statement on Form S-1 as filed with
the SEC on August 5, 1999, File No. 333-84533)
10.14 First Modification and Ratification of Lease, dated November
1, 1999, by and between TriZetto and St. Paul Properties,
Inc. (Incorporated by reference to Exhibit 10.22 of
TriZetto's Form 10-K as filed with the SEC on March 30,
2000, File No. 000-27501)
10.15 Second Modification and Ratification of Lease, dated
December 1999, by and between TriZetto and St. Paul
Properties, Inc. (Incorporated by reference to Exhibit 10.23
of TriZetto's Form 10-K as filed with the SEC on March 30,
2000, File No. 000-27501)
10.16 Third Modification and Ratification of Lease, dated January
15, 2000, by and between TriZetto and St. Paul Properties,
Inc. (Incorporated by reference to Exhibit 10.16 of
TriZetto's Form 10-K as filed with the SEC on April 2, 2001,
File No. 000-27501)
10.17 Fourth Modification and Ratification of Lease, dated October
15, 2000, by and between TriZetto and St. Paul Properties,
Inc. (Incorporated by reference to Exhibit 10.17 of
TriZetto's Form 10-K as filed with the SEC on April 2, 2001,
File No. 000-27501)
10.18 Form of Voting Agreement (Incorporated by reference to
Exhibit 2.1 of TriZetto's Form 8-K as filed with the SEC on
May 19, 2000, File No. 000-27501)
10.19+ Secured Term Note, dated September 11, 2000, payable by
TriZetto and each of TriZetto's subsidiaries to Heller
Healthcare Finance, Inc. (Incorporated by reference to
Exhibit 10.1 of TriZetto's Form 10-Q as filed with the SEC
on November 14, 2000, File No. 000-27501)
87
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.20+ Loan and Security Agreement, dated September 11, 2000, by
and among TriZetto, each of TriZetto's subsidiaries, and
Heller Healthcare Finance, Inc. (Incorporated by reference
to Exhibit 10.2 of TriZetto's Form 10-Q as filed with the
SEC on November 14, 2000, File No. 000-27501)
10.21 Revolving Credit Note, dated September 11, 2000, payable by
TriZetto and each of TriZetto's subsidiaries to Heller
Healthcare Finance, Inc. (Incorporated by reference to
Exhibit 10.3 of TriZetto's Form 10-Q as filed with the SEC
on November 14, 2000, File No. 000-27501)
10.22 Amendment No. 1 to Loan and Security Agreement, dated
October 17, 2000, by and among TriZetto, each of TriZetto's
subsidiaries, and Heller Healthcare Finance, Inc.
(Incorporated by reference to Exhibit 10.4 of TriZetto's
Form 10-Q as filed with the SEC on November 14, 2000, File
No. 000-27501)
10.23 Amended and Restated Revolving Credit Note, dated October
17, 2000, payable by TriZetto and each of TriZetto's
subsidiaries to Heller Healthcare Finance, Inc.
(Incorporated by reference to Exhibit 10.5 of TriZetto's
Form 10-Q as filed with the SEC on November 14, 2000, File
No. 000-27501)
10.24+ Amendment No. 2 to Loan and Security Agreement, dated
December 28, 2000, by and among TriZetto, each of TriZetto's
subsidiaries, and Heller Healthcare Finance, Inc.
(Incorporated by reference to Exhibit 10.24 of TriZetto's
Form 10-K as filed with the SEC on April 2, 2001, File No.
000-27501)
10.25 Second Amended and Restated Revolving Credit Note, dated
December 28, 2000, payable by TriZetto and each of
TriZetto's subsidiaries to Heller Healthcare Finance, Inc.
(Incorporated by reference to Exhibit 10.25 of TriZetto's
Form 10-K as filed with the SEC on April 2, 2001, File No.
000-27501)
10.26 Bank One Credit Facility (including Promissory Note,
Business Loan Agreement and Commercial Pledge and Security
Agreement), dated October 27, 1999 (Incorporated by
reference to Exhibit 10.21 of TriZetto's Form 10-K as filed
with the SEC on March 30, 2000 File No. 000-27501)
10.27 Amendment to Bank One Credit Facility, dated June 22, 2000
(including Promissory Note Modification Agreement, Business
Loan Agreement and Commercial Pledge and Security Agreement)
(Incorporated by reference to Exhibit 10.27 of TriZetto's
Form 10-K as filed with the SEC on April 2, 2001, File No.
000-27501)
10.28 Amendment to Bank One Credit Facility, dated November 4,
2000 (including Change in Terms Agreement) (Incorporated by
reference to Exhibit 10.28 of TriZetto's Form 10-K as filed
with the SEC on April 2, 2001, File No. 000-27501)
10.29+ Stockholder Agreement, dated as of October 2, 2000, by and
between TriZetto and IMS Health Incorporated (Incorporated
by reference to Exhibit 10.29 of TriZetto's Form 10-K as
filed with the SEC on April 2, 2001, File No. 000-27501)
10.30 Registration Rights Agreement, dated as of October 2, 2000,
by and between TriZetto and IMS Health Incorporated
(Incorporated by reference to Exhibit 10.30 of TriZetto's
Form 10-K as filed with the SEC on April 2, 2001, File No.
000-27501)
21.1 Current Subsidiaries of TriZetto
23.1 Consent of PricewaterhouseCoopers LLP
- ---------------
* This exhibit is identified as a management contract or compensatory plan or
arrangement of TriZetto pursuant to Item 14(a) of Form 10-K.
+ Certain exhibits to, and schedules delivered in connection with, this exhibit
have been omitted pursuant to Item 601(b)(2) of Regulation S-K. TriZetto
agrees to supplementary furnish to the SEC a copy of any such exhibit or
schedule upon request.