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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTER ENDED MARCH 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, $.001
PAR VALUE
----------------
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 [ ]
As of April 30, 2000, 21,270,428 shares of the issuer's common stock were
outstanding.
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Form 10-Q
For the Quarter Ended March 31, 2000
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Condensed Consolidated Balance Sheets - as of
March 31, 2000 (unaudited) and December 31, 1999 3
Unaudited Condensed Consolidated Statements of Operations
for the three months ended March 31, 2000 and 1999 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2000 and 1999 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 15
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 16
Item 2 - Changes in Securities and Use of Proceeds 16
Item 4 - Submission of Matters to a Vote of Security Holders 17
Item 5 - Other Information 17
Item 6 - Exhibits and Reports on Form 8-K 18
SIGNATURES 19
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE TRIZETTO GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2000 1999
-------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 11,552 $ 18,849
Short-term investments 3,978 5,957
Accounts receivable, net 8,695 8,228
Prepaid expenses and other current assets 1,576 1,800
Income tax receivable 440 440
-------- --------
Total current assets 26,241 35,274
Property and equipment, net 10,938 10,797
Long-term investments 1,230 1,230
Other assets 349 265
Note receivable from related party 538 525
Goodwill and other intangible assets, net 23,153 20,327
-------- --------
Total assets $ 62,449 $ 68,418
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term note payable $ 337 $ 623
Capital lease obligations, current 1,232 1,234
Accounts payable 2,371 3,102
Accrued liabilities 8,439 9,172
Income taxes payable -- 22
Deferred revenue 294 241
-------- --------
Total current liabilities 12,673 14,394
Long-term notes payable 342 504
Capital lease obligations 1,983 2,223
Deferred revenue 32 --
-------- --------
Total liabilities 15,030 17,121
-------- --------
Stockholders' equity:
Common stock: 21 21
Additional paid-in capital 69,753 66,214
Notes receivable from stockholders (41) (41)
Deferred stock compensation (5,320) (5,784)
Accumulated deficit (16,994) (9,113)
-------- --------
Total stockholders' equity 47,419 51,297
-------- --------
Total liabilities and stockholders' equity $ 62,449 $ 68,418
======== ========
See Notes to Unaudited Condensed Consolidated Financial Statements
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THE TRIZETTO GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
--------- --------
Revenues:
Recurring revenue $ 11,967 $ 1,421
Non-recurring revenue 5,750 2,832
-------- -------
Total revenues 17,717 4,253
-------- -------
Cost of revenues:
Recurring revenue 11,262 1,318
Non-recurring revenue 4,000 1,700
-------- -------
Total cost of revenues 15,262 3,018
-------- -------
Gross profit 2,455 1,235
-------- -------
Operating expenses:
Research and development 1,631 206
Selling, general and administrative 7,941 1,229
Amortization of deferred stock compensation 464 81
Write-off of acquired in-process technology 536 484
-------- -------
Total operating expenses 10,572 2,000
-------- -------
Loss from operations (8,117) (765)
Interest income 263 38
Interest expense 27 32
-------- -------
Loss before provision for income taxes (7,881) (759)
Provision for income taxes -- 30
-------- -------
Net loss $ (7,881) $ (789)
======== =======
Net loss per share:
Basic and diluted $ (0.42) $ (0.15)
======== =======
Shares used in computing net loss per share:
Basic and diluted 18,888 5,204
======== =======
See Notes to Unaudited Condensed Consolidated Financial Statements
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THE TRIZETTO GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,881) (801)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for doubtful accounts 126 --
Amortization of deferred stock compensation 464 80
Write-off of acquired in-process technology 536 484
Depreciation and amortization 2,728 223
Changes in operating assets and liabilities:
Accounts receivable (388) 227
Prepaid expenses and other current assets 280 15
Note receivable (13) --
Accounts payable (760) 320
Accrued liabilities (1,012) (245)
Deferred revenue 74 --
Other long-term assets (85) --
-------- -------
Net cash provided by (used in) operating activities (5,931) 303
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investments 1,979 --
Purchase of property and equipment and software licenses (1,111) (309)
Acquisitions, net of cash acquired (1,497) (1,334)
-------- -------
Net cash used in investing activities (629) (1,643)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable, net (448) (32)
Principal payments on capital leases (329) (48)
Repayment of notes receivable -- 30
Proceeds from exercise of employee stock options 40 --
-------- -------
Net cash used in financing activities (737) (50)
-------- -------
Net decrease in cash and cash equivalents (7,297) (1,390)
Cash and cash equivalents, beginning of period 18,849 3,681
-------- -------
Cash and cash equivalents, end of period $ 11,552 $ 2,291
======== =======
See Notes to Unaudited Condensed Consolidated Financial Statements
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THE TRIZETTO GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
1. BASIS OF PREPARATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by The TriZetto Group, Inc. ("the Company") in accordance with
generally accepted accounting principles for interim financial information that
are consistent in all material respects with those applied in the Company's
Annual Report on Form 10K for the fiscal year ended December 31, 1999 and
pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of
the Securities and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three months
ended March 31, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000, or for any future period. The
financial statements and notes should be read in conjunction with the
consolidated financial statements and footnotes thereto included in the
Company's Form 10-K as filed with the Securities and Exchange Commission on
March 30, 2000.
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THE TRIZETTO GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
2. COMPUTATION OF LOSS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net loss by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common shares issuable
through stock options, warrants and other convertible securities. The following
is a reconciliation of the numerator (net loss) and the denominator (number of
shares) used in the basic and diluted EPS calculations (in thousands, except per
share data):
THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
-------- --------
BASIC AND DILUTED:
Net loss $ (7,881) $ (789)
-------- --------
Weighted average common shares outstanding 18,888 5,125
-------- --------
Net loss per share $ (0.42) $ (0.15)
-------- --------
ANTIDILUTIVE SECURITIES:
Preferred stock -- 4,545
Contingently issuable shares 535 --
Options to purchase common stock 3,479 1,423
Common stock subject to repurchase 1,699 4,484
Warrants -- 89
-------- --------
5,713 10,541
======== ========
3. 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 is defined as net
income plus all revenues, expenses, gains and losses from non-owner sources that
are excluded from net income in accordance with generally accepted accounting
principles. For all periods presented, there were no material differences
between comprehensive and net income.
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THE TRIZETTO GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
4. SUPPLEMENTAL CASH FLOW DISCLOSURES
THREE MONTHS
ENDED
MARCH 31,
--------------------
2000 1999
------ ------
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION
Cash paid for interest 70 16
Cash paid for income taxes -- 33
NONCASH INVESTING AND FINANCING ACTIVITIES
Assets acquired through capital lease 87 --
Deferred stock compensation 464 80
Issuance of notes payable to acquire software
and software license
Common stock issued for Creative Business
Solutions -- 1,146
Notes payable issued for Creative Business
Solutions -- 270
Common stock issued for acquisition
of Healthcare Media Enterprises 3,500 --
5. ACQUISITIONS
On January 11, 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 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 fair market values on the acquisition date. The purchase price of
approximately $5.4 million consisted of cash in the amount of approximately $1.4
million, 87,359 shares of common stock with a value of $40.06 per share, assumed
liabilities of $191,000 and acquisition costs of approximately $316,000. Of the
total purchase price, $536,000 was allocated to in-process technology and the
remainder of the purchase price was allocated to assets acquired and liabilities
assumed. Of the 87,359 shares of common stock which have been issued in
connection with this acquisition, 17,472 shares of the common stock are being
held in escrow until the resolution of certain pre-acquisition contingencies.
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 $5.0 million, of which $536,000 was
allocated to acquired in-process technology, based upon an independent
appraisal, and was expensed in the quarter ended March 31, 2000, and $4.5
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. The
in-process and core technology was scheduled to be released by the third quarter
of 2000.
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THE TRIZETTO GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
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 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 purchase price allocations were based on the estimated fair value of the
assets, less liabilities, on the date of purchases as follows (in thousands):
Total current assets $ 336
Property, plant, equipment and other
noncurrent assets 88
Goodwill 3,532
Other intangible assets 922
Acquired in-process technology 536
------
Total purchase price $5,414
======
The following unaudited pro forma summary presents the consolidated results
of operations of the Company as if the acquisition of HME occurred on January 1,
1999, giving effect to an acquisition adjustment for amortization of goodwill
and other intangibles and the write-off of acquired in-process technology (in
thousands):
YEAR ENDED QUARTER ENDED
DECEMBER 31, 1999 MARCH 31, 2000
----------------- --------------
Net revenue $36,284 $17,717
Net loss $(9,588) $(7,881)
On March 28, 2000, the Company entered into an Agreement and Plan of
Reorganization with IMS Health Incorporated, a Delaware corporation, pursuant to
which IMS will merge with and into the Company. At the closing, the Company will
issue .4655 shares of the Company's Common Stock for each share of outstanding
common stock of IMS. On the date of signing, the transaction was valued at
approximately $8.6 billion. Consummation of the merger is subject to the
approval of each company's stockholders as well as various third parties and
federal agencies.
6. LINE OF CREDIT
In March 1999, we entered into a revolving line of credit with a financial
institution. In October 1999, we entered into a subsequent agreement which
increased the amount available under the line of credit. The total amount
available for borrowings under the line of credit is $3.0 million and expires in
November 2000. Borrowings under the line of credit bear interest at the bank's
prime rate plus 0.5%. Interest is payable monthly as it accrues. The credit
agreement contains certain covenants that we must adhere to during the term of
the agreement, including restrictions on the payment of dividends. As of March
31, 2000, there were no outstanding borrowings on the line of credit. At March
31, 2000 we were not in compliance with certain covenants related to our line of
credit and a forbearance was granted by the bank.
In December 1999, we entered into a line of credit with a financial
institution. This line of credit was specifically established to finance
computer equipment purchases. The line of credit has a total capacity of $2.0
million and expires in December 2000. Borrowings under the lease line of credit
at March 31, 2000 totaled approximately $973,000, and are collateralized by
substantially all of our assets.
7. 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," which established accounting and reporting
standards for derivative instruments and hedging activities. SFAS 133 is
effective for fiscal years beginning after June 15, 2000. It requires that an
entity recognizes all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. To
date, we have not engaged in derivative and hedging activities.
In December 1999, the Securities and Exchange Commission ("SEC") issued
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 revenue and for disclosure related to revenue
recognition policies in financial statements filed with the SEC. We believe that
adopting SAB 101 will not have a material impact on our financial position or
results of operations.
In March 2000, the FASB issued Interpretation No. 44, or FIN 44, "Accounting
for Certain Transactions Involving Stock Compensation," which is an
interpretation of Accounting Principal Board No. 25. This interpretation
clarifies:
o the definition of employee for purposes of applying Opinion 25, which
deals with stock compensation issues;
o the criteria for determining whether a plan qualifies as a noncompensatory
plan;
o the accounting consequence of various modifications to the terms of a
previously fixed stock option or award; and
o the accounting for an exchange of stock compensation awards in a business
combination.
This interpretation is effective July 1, 2000, but certain conclusions in
this interpretation cover specific events that occur after either December 15,
1998, or January 12, 2000. To the extent that this interpretation covers events
occurring during the period after December 15, 1998, or January 12, 2000, but
before the effective date of July 1, 2000, the effects of applying this
interpretation are recognized on a prospective basis from July 1, 2000. The
adoption of FIN 44 does not have a material impact on our financial statements.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
OVERVIEW
We are the leading application services provider of remotely hosted third
party and proprietary software applications and related services for use in the
healthcare industry. We host or deploy software applications from leading
software vendors, including Epic Systems, Inc., Medic Computer Systems, Inc.,
McKesson HBOC, Inc., Raintree Systems, Inc., InfoMedtrics, Inc., CTR Business
Systems, Inc., Penchart, and QCSI by operating and maintaining such applications
at our Customer Connectivity Centers. We also offer HealthWeb, an
Internet-browser based application that serves as a portal for the exchange of
information and services over the Internet and e-Business applications.
HealthWeb is designed to facilitate the exchange of information and to enable
e-commerce among all constituents of the healthcare industry. Through our
Transformation Services Group, we offer business operations and applications
integration consulting services, including information technology assessment and
software implementation design and development. Our customers primarily consist
of provider groups, physician practice management companies, and managed care
organizations such as health maintenance organizations, preferred provider
organizations and third party administrators.
Our revenues are classified into two categories: recurring or multi-year
contractually based revenue, and revenue generated via non-recurring agreements.
Since inception, the relative percentage of recurring revenue has been
increasing. As we sign additional multi-year application services contracts, we
expect the relative percentage of recurring revenue to continue to increase.
Recurring revenue is subscription based and billed on a monthly basis over a
contract term of typically three to five years. The amount billed monthly is
based on units of volume, such as numbers of physicians, members or desktops
covered by each contract. Recurring revenue is recognized ratably over the term
of the contract, and cash received in excess of revenue recognized is recorded
as deferred revenue. Non-recurring revenue is billed on either a time and
materials or a fixed fee basis, and is recognized as the non-recurring services
are performed.
Cost of revenues 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
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Connectivity Centers. These costs include salaries and related expenses for
consulting personnel, Customer Connectivity Centers personnel, customer support
personnel, application software license fees, telecommunications and maintenance
costs.
Research and development expenses are salaries and related expenses
associated with the development of technologies, applications and services and
include compensation paid to engineering personnel and fees to outside
contractors and consultants.
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. We
anticipate that sales, general and administrative costs will continue to
increase in absolute dollars as we add sales, marketing and administrative
personnel, increase our marketing and promotional activities and incur costs
related to being a public company, such as directors' and officers' insurance
premiums and professional fees.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2000 COMPARED TO QUARTER ENDED MARCH 31, 1999
REVENUES. Total revenues in the first quarter of 2000 increased $13.5
million, or 317%, to $17.7 million from $4.2 million for the same period in
1999. The majority of this increase was due to the overall growth in both
recurring revenue and non-recurring revenue throughout the three-month period
ended March 31, 2000. Additionally, the acquisition of Novalis Corporation in
November 1999, Finserv Health Care Systems in December 1999, and HME in January
2000 generated approximately $4.5 million, $1.0 million, and $454,000,
respectively, in incremental revenue in the first quarter of 2000.
Recurring revenue in the first quarter of 2000 increased $10.5 million, or
742%, to $12.0 million from $1.4 million for the same period in 1999. Of this
increase, $3.8 million was generated from the acquisitions of Novalis and
Finserv.
Non-recurring revenue in the first quarter of 2000 increased $2.9 million,
or 103%, to $5.8 million from $2.8 million for the same period in 1999. This
increase was due primarily to the acquisition of Novalis, Finserv and HME which
resulted in incremental non-recurring revenue of $2.1 million for the three
months ended March 31, 2000.
COST OF REVENUES. Cost of revenues for the three months ended March 31, 2000
increased $12.2 million, or 406%, to $15.3 million from $3.0 million for the
same period in 1999. This increase was due to the costs incurred to support the
overall expansion of our business, including our acquisition of Novalis
Corporation in November 1999, Finserv Health Care Systems in December 1999, and
HME in January 2000. As a percentage of total revenues, cost of revenues
approximated 86% in the first quarter of 2000 and 71% in the first quarter of
1999.
Cost of recurring revenue in the first quarter of 2000 increased $9.9
million, or 754%, to $11.3 million from $1.3 million for the same period in
1999. This increase represented the incremental expenses for personnel and
facilities costs incurred to support the growing application services provider
business, including the incremental costs associated with the acquisitions of
Novalis and Finserv. As a percentage of recurring revenue, cost of recurring
revenue approximated 94% in the first quarter of 2000 and 93% in the first
quarter of 1999.
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Cost of non-recurring revenue in the first quarter of 2000 increased $2.4
million, or 135%, to $4.0 million from $1.7 million for the same period in
1999. This increase was due to incremental costs required to support increasing
demand for our consulting services in the three months ended March 31, 2000.
Additionally, the acquisitions of Novalis, Finserv and HME incurred additional
costs. As a percentage of non-recurring revenue, cost of non-recurring revenue
approximated 70% in the first quarter of 2000 and 60% in the first quarter of
1999.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in the
first quarter of 2000 increased $1.4 million, or 693%, to $1.6 million from
$206,000 for the same period in 1999. The increase was primarily due to a
significant increase in the amount of resources engaged in the development of
our applications and services. Expenses relating to system enhancements from
which we derive revenue are not classified as research and development and are
included in cost of revenues. As a percentage of total revenues, research and
development expenses approximated 9% in the first quarter of 2000 and 5% in the
first quarter of 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in the first quarter of 2000 increased $6.7 million, or
546%, to $7.9 million from $1.2 million for the same period in 1999. This
increase 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 revenues, selling, general and administrative
expenses approximated 45% in the first quarter of 2000 and 29% in the first
quarter of 1999.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. Amortization of deferred stock
compensation increased $383,000 in the first quarter of 2000 to $464,000 from
$81,000 for the same period in 1999. This amount represents the allocated
portion of the difference between the deemed fair value of our common stock and
the exercise price of stock options granted by us to employees.
INTEREST INCOME. Interest income in the first quarter of 2000 increased
$225,000, or 592%, to $263,000 from $38,000 for the same period in 1999. The
increase was due to the increase in cash available for investing due to proceeds
received from our initial public offering in October 1999.
INTEREST EXPENSE. Interest expense in the first quarter of 2000 decreased
$5,000, or 17%, $27,000 from $32,000 for the same period in 1999. The decrease
was due to the pay down of notes payables and capital lease obligations.
PROVISION FOR (BENEFIT OF) INCOME TAXES. Provision for income tax for the
three months ended March 31, 2000 decreased $30,000, or 100%, to $0 from an
income tax provision of $30,000 for the same period in 1999.
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LIQUIDITY AND CAPITAL RESOURCES
Since inception we have financed our operations primarily through a
combination of cash from operations, private financings and an initial public
offering of our common stock. As of March 31, 2000 we had approximately $16.8
million of cash, cash equivalents, short-term investments and long-term
investments.
Cash used in operating activities in the first quarter of 2000 was $5.9
million. Cash used during this period was primarily attributable to net losses
of $7.9 million, which was offset in part by depreciation and amortization,
amortization of deferred stock compensation, and write off of in-process
technology. 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.
Cash used in investing activities in the three months ended March 31, 2000
was $629,000. Cash used during this period was primarily the result of our
purchase of $1.1 million in property and equipment and software licenses and the
$1.5 million cash portion (net of cash acquired) of our acquisition of HME in
January 2000. These expenditures were partially offset by the sale of $2.0
million of our short-term investments.
Cash used in financing activities in the three months ended March 31, 2000
was $737,000. The cash used during this period was primarily the result of
principal payments on notes payable and capital lease obligations.
In March 1999, we entered into a revolving line of credit with a financial
institution. In October 1999, we entered into a subsequent agreement which
increased the amount available under the line of credit. The total amount
available for borrowings under the line of credit is $3.0 million and expires in
November 2000. Borrowings under the line of credit bear interest at the bank's
prime rate plus 0.5%. Interest is payable monthly as it accrues. The credit
agreement contains certain covenants that we must adhere to during the term of
the agreement, including restrictions on the payment of dividends. As of March
31, 2000, there were no outstanding borrowings on the line of credit. At March
31, 2000 we were not in compliance with certain covenants related to our line of
credit and a forbearance was granted by the bank.
In December 1999, we entered into a line of credit with a financial
institution. This line of credit was specifically established to finance
computer equipment purchases. The line of credit has a total capacity of $2.0
million and expires in December 2000. Borrowings under the lease line of credit
at March 31, 2000 totaled approximately $973,000, and are collateralized by
substantially all of our assets.
We believe existing cash balances, cash generated from operations and future
borrowings under our line of credit will be sufficient to meet our working
capital and capital requirements for at least the next 12 months.
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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," which established accounting and reporting
standards for derivative instruments and hedging activities. SFAS 133 is
effective for fiscal years beginning after June 15, 2000. It requires that an
entity recognizes all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. To
date, we have not engaged in derivative and hedging activities.
In December 1999, the Securities and Exchange Commission ("SEC") issued
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 revenue and for disclosure related to revenue
recognition policies in financial statements filed with the SEC. We believe that
adopting SAB 101 will not have a material impact on our financial position or
results of operations.
In March 2000, the FASB issued Interpretation No. 44, or FIN 44, "Accounting
for Certain Transactions Involving Stock Compensation," which is an
interpretation of Accounting Principal Board No. 25. This interpretation
clarifies:
o the definition of employee for purposes of applying Opinion 25, which
deals with stock compensation issues;
o the criteria for determining whether a plan qualifies as a noncompensatory
plan;
o the accounting consequence of various modifications to the terms of a
previously fixed stock option or award; and
o the accounting for an exchange of stock compensation awards in a business
combination.
This interpretation is effective July 1, 2000, but certain conclusions in
this interpretation cover specific events that occur after either December 15,
1998, or January 12, 2000. To the extent that this interpretation covers events
occurring during the period after December 15, 1998, or January 12, 2000, but
before the effective date of July 1, 2000, the effects of applying this
interpretation are recognized on a prospective basis from July 1, 2000. The
adoption of FIN 44 does not have a material impact on our financial statements.
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ITEM 3. 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 March 31,
2000, we have not used derivative instruments or engaged in hedging activities.
The interest payable on our $3.0 million credit facility is variable, based
on the prime rate, and, therefore, affected by changes in market interest rates.
Although as of March 31, 2000, the amount outstanding on our credit facility was
zero, letters of credit approximating $319,000 had been written against the
credit facility. The line of credit expires in November 2000. Changes in
interest rates have no impact on our other debt as all of our other notes are at
fixed interest rates between 8% and 10%. 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.
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PART II - OTHER INFORMATION
ITEM 1. 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. As of the date
of this report, we 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES
On January 11, 2000, we issued 87,359 shares of our common stock to former
shareholders of Healthcare Media Enterprises, Inc. ("HME") pursuant to an
Agreement and Plan of Merger in exchange for all of the issued and outstanding
shares of capital stock of HME. 17,472 of these shares are being held in escrow
through January 11, 2001 to secure the indemnification obligations of the former
shareholders of HME.
We did not employ any underwriters, brokers or finders in connection with
the HME transaction.
The sale of the securities listed above was 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, as a transaction by an
issuer not involving a public offering. The recipients of securities in 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 transaction. All recipients had
adequate access to information about us through our filings with the SEC and
their relationships with us.
USE OF PROCEEDS
On October 7, 1999, we effected a registration statement with the SEC on
Form S-1, as amended, Registration No. 333-84533, whereby we registered shares
of our common stock. As of March 31, 2000, we have used a total of approximately
$19.2 million of the net proceeds from our initial public offering, of which
approximately $7.0 million was used for working capital and other general
corporate purposes, approximately $2.1 million was used to pay down debt,
approximately $2.5 million was used for the purchase of property and equipment
and approximately $7.6 million was used to acquire new businesses.
LIMITATIONS ON PAYMENTS OF DIVIDENDS
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 consent.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 28, 2000, we entered into an Agreement and Plan of Reorganization with
IMS Health Incorporated, pursuant to which IMS will merge with and into TriZetto
and each issued and outstanding share of IMS's common stock, par value $.01 per
share will be converted into 0.4655 validly issued, fully paid and nonassessable
share of common stock of TriZetto, par value $.001 per share. In connection with
the proposed merger, TriZetto, its directors, executive officers and certain
other members of management and employees solicited proxies from certain holders
of an aggregate of approximately 51% of the outstanding common stock of
TriZetto. Such stockholders have entered into Voting Agreements with IMS to vote
in favor of the merger and the transactions contemplated thereby. Forms of the
Voting Agreements were included as exhibits to the Agreement and Plan of
Reorganization which was filed as Exhibit 2.1 to our Form 8-K filed with the SEC
on April 21, 2000. As of the date hereof, a special stockholders meeting to
approve the proposed merger has not been held.
ITEM 5. OTHER INFORMATION
Attached hereto as Exhibit 99.2 and incorporated by reference herein is the
press release dated April 18, 2000 in which we jointly announced with IMS that
IMS and Trizetto were in discussions regarding transaction alternatives.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are filed as a part of this report:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Agreement and Plan of Reorganization, dated as of March 28,
2000, between TriZetto and IMS Health Incorporated
(Incorporated by reference to Exhibit 2.1 of TriZetto's Form
8-K as filed with the Securities and Exchange Commission on
April 21, 2000, File No. 000-27501)
10.1 Form of Change of Control Agreement entered into by and
between TriZetto and certain executive officers of TriZetto
effective as of February 18, 2000
27.1 Financial Data Schedule
99.1 Press release, dated March 29, 2000, issued by IMS Health
Incorporated and TriZetto (Incorporated by reference to
Exhibit 99.1 of TriZetto's Form 8-K as filed with the
Securities and Exchange Commission on April 21, 2000, File
No. 000-27501)
99.2 Press release, dated April 18, 2000, issued by IMS Health
Incorporated and TriZetto.
(b) Reports on Form 8-K
On January 6, 2000, we filed a Form 8-K (Item 2) relating to our
acquisition of all of the issued and outstanding capital stock of
Finserv Health Care Systems, Inc. On March 6, 2000, we filed a Form
8-K/A containing financial statements of the business acquired and
proforma financial information relating to such transaction.
On February 14, 2000, we filed a Form 8-K/A containing financial
statements of the business acquired and proforma financial information
relating to our acquisition of all of the issued and outstanding capital
stock of Novalis Corporation, as previously reported on a Form 8-K filed
on December 14, 1999.
On April 21, 2000, we filed a Form 8-K (Item 5) announcing the Agreement
and Plan of Reorganization which we entered into with IMS Health
Incorporated effective March 28, 2000, pursuant to which IMS Health
Incorporated will merge with and into TriZetto.
There were no other items to be reported under Part II of this report.
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SIGNATURES
Pursuant to the requirements 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.
THE TRIZETTO GROUP, INC.
Date: May 15, 2000 By: /s/ MICHAEL J. SUNDERLAND
---------------------------------
Michael J. Sunderland
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
2.1 Agreement and Plan of Reorganization, dated as of March 28,
2000, between TriZetto and IMS Health Incorporated
(Incorporated by reference to Exhibit 2.1 of TriZetto's Form
8-K as filed with the Securities and Exchange Commission on
April 21, 2000, File No. 000-27501)
10.1 Form of Change of Control Agreement entered into by and
between TriZetto and certain executive officers of TriZetto
effective as of February 18, 2000
27.1 Financial Data Schedule
99.1 Press release, dated March 29, 2000, issued by IMS Health
Incorporated and TriZetto (Incorporated by reference to
Exhibit 99.1 of TriZetto's Form 8-K as filed with the
Securities and Exchange Commission on April 21, 2000, File
No. 000-27501)
99.2 Press release, dated April 18, 2000, issued by IMS Health
Incorporated and TriZetto.