<PAGE> 1
This filing is made
pursuant to Rule
424(b)(4) under the
Securities Act of 1933
in connection with
Registration No.
333-84533
PROSPECTUS
4,200,000 SHARES
[TRIZETTO LOGO]
COMMON STOCK
-------------------------
This is an initial public offering of 4,200,000 shares of common stock of The
TriZetto Group, Inc. Of the 4,200,000 shares of common stock offered under this
prospectus, we are offering 3,850,000 shares and Raymond D. Croghan and his
charitable remainder trust are offering an additional 350,000 shares. We will
not receive any of the proceeds from the shares of common stock sold by Raymond
D. Croghan and his charitable remainder trust.
Our common stock has been approved for listing on the Nasdaq National Market
under the symbol "TZIX."
At our request, the underwriters will reserve at the initial public offering
price up to $2 million of common stock for sale to Employers Health Insurance
Company (a wholly-owned subsidiary of Humana Inc.) which has expressed a
non-binding interest in acquiring these shares. This would represent an
aggregate of 222,222 shares of common stock at the initial public offering price
of $9.00 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 TO READ ABOUT RISKS THAT YOU SHOULD
CONSIDER CAREFULLY BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS
APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Public offering price....................................... $9.00 $37,800,000
Underwriting discounts and commissions...................... $0.63 $ 2,646,000
Proceeds, before expenses, to us............................ $8.37 $32,224,500
Proceeds to selling stockholders............................ $8.37 $ 2,929,500
</TABLE>
-------------------------
We have granted the underwriters a 30-day option to purchase up to 630,000
additional shares of common stock from us at the initial public offering price
less the underwriting discount.
The underwriters are severally underwriting the shares being offered. The
underwriters expect to deliver the shares in New York, New York, on October 13,
1999.
-------------------------
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
ADAMS, HARKNESS & HILL, INC.
WIT CAPITAL CORPORATION
THE DATE OF THIS PROSPECTUS IS OCTOBER 7, 1999.
<PAGE> 2
[TRIZETTO LOGO]
<PAGE> 3
PROSPECTUS SUMMARY
This summary highlights information found in greater detail elsewhere in
this prospectus. In addition to this summary, we urge you to read the entire
prospectus carefully, including the risks of investing in our common stock
discussed under "Risk Factors," before you decide to buy our common stock.
Except as otherwise noted, all information in this prospectus:
- reflects the automatic conversion of all outstanding shares of our
preferred stock into an aggregate of 6,276,224 shares of common stock
upon the closing of this offering;
- assumes outstanding options to purchase shares of common stock have not
been exercised; and
- assumes the underwriters' over-allotment option is not exercised.
THE TRIZETTO GROUP, INC.
OUR COMPANY
We provide complete information technology solutions to our healthcare
industry customers. These solutions include providing and managing remotely
operated software applications, establishing and maintaining Internet and other
network connections, and developing and hosting healthcare Internet portals that
are tailored to the needs of our customers. We also offer professional
information technology consulting services that improve our customers' use of a
variety of software applications, information technology or Internet service.
Our customers primarily include provider groups, physician practice management
companies and managed care organizations such as health maintenance
organizations, preferred provider organizations and third party administrators.
By providing a comprehensive set of information technology solutions, we
eliminate our customers' needs to manage and support their own computer systems,
networks and software, allowing them to concentrate on their primary business.
The third party packaged and proprietary software applications we host may
be used for communications, physician office practice management, billings and
collections, claims processing, accounting and other business functions. We have
acquired rights to deploy numerous commercially available software applications
from a variety of healthcare software vendors, including Epic Systems, Inc.,
Medic Computer Systems, Inc., Medical Manager Corporation and McKesson HBOC,
Inc. We host these software applications from our facilities on most of the
widely used computing, networking and operating platforms. We provide access to
our hosted software applications either across the Internet or across
traditional networks. Our proprietary solutions and methods enable our customers
to access our hosted software applications using leading Internet browsers. We
believe that this method of access differentiates us from our competitors.
HealthWeb(TM), our healthcare Internet portal, provides access to software
applications, whether they operate on new or legacy platforms, from a single
screen on our HealthWeb users' computer desktops. From a variety of menu choices
on the same screen, our HealthWeb users can submit forms and claims, order
supplies, transmit patient data, gather information from other websites and
perform other tasks over the Internet. HealthWeb is tailored to specifically
address the requirements of individual users which we expect will include most
types of healthcare administrative staff. HealthWeb is currently being used by a
test group of providers and is in full use by a number of payers. Currently,
providers use HealthWeb for day-to-day office administration activities, access
to health plans and communication with patients. Payers currently use HealthWeb
to exchange information with their providers and members. We expect to widely
offer HealthWeb to other users by the end of 1999 after we develop additional
functions and features based upon the feedback we receive from our test group.
Our Professional Services Group takes a vendor-independent approach to
supporting our customers' use of any software application and healthcare
Internet solutions. Our qualified information technology professionals, who were
recruited from the healthcare industry, provide consulting services specifically
developed to address our customers' information technology needs. Our consulting
professionals analyze
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our customers' business strategies, technical competence, business management
processes and abilities to support their existing information technology. Based
upon this analysis, our professionals recommend and implement software and
technology best suited to our customers' business needs. In addition, we provide
executive-level information technology professionals and temporary technicians
and software programmers for our clients who do not have, choose not to have, or
cannot afford, their own information technology staff.
Our software applications, information technology services and HealthWeb
offer our customers the following key benefits:
- rapid deployment and ease of connection of a variety of software
applications;
- access to additional useful functions of the Internet;
- reasonable, predictable costs;
- reliability and scalability;
- lower implementation risk;
- preservation of existing investment in existing legacy systems; and
- access to healthcare and managed care industry expertise.
Our objective is to enhance our position as a leading provider of software
applications and related information technology services used in the healthcare
industry and establish HealthWeb as a leading healthcare Internet portal. We
expect to achieve this objective by offering our customers high quality,
reliable, flexible and cost-effective applications, additional methods to more
effectively use the Internet and professional consulting services. The key
elements of our strategy include:
- attracting new customers and increasing penetration of existing
customers;
- expanding our software application portfolio;
- developing and acquiring additional Internet and e-commerce technologies;
- increasing use of HealthWeb by both existing and new customers;
- pursuing strategic alliances and acquisitions; and
- attracting additional information technology and industry professionals.
CORPORATE INFORMATION
TriZetto was incorporated in Delaware on May 27, 1997 as M C Health
Holdings, Inc. In October 1997, we exchanged 5,800,895 shares of our common
stock for all the equity interests in Croghan & Associates, Inc., a Colorado
corporation, and 3,716,667 shares of our common stock for all the equity
interests in Margolis Health Enterprises, Inc., a California corporation, which
was an entity under our common control. Both Croghan & Associates and Margolis
Health Enterprises became our wholly-owned subsidiaries. On March 18, 1998, we
changed our name to The TriZetto Group, Inc. On February 5, 1999, in
simultaneous transactions, we acquired Creative Business Solutions, Inc., a
Texas corporation, and HealthWeb Systems, Ltd., a Texas limited partnership. All
the assets and liabilities of HealthWeb were later transferred to Creative
Business Solutions, Inc., and HealthWeb Systems, Ltd. dissolved in March 1999.
Any references to "we," "our" or "TriZetto" refer to The TriZetto Group,
Inc. and our subsidiaries. Our executive offices are located at 567 San Nicolas
Drive, Suite 360, Newport Beach, CA 92660. Our telephone number is (949)
719-2200. Our website address is www.trizetto.com. Information contained in our
website does not constitute part of this prospectus.
2
<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by us........................... 3,850,000 shares
Common stock offered by Raymond D. Croghan and his
charitable remainder trust......................... 350,000 shares
Common stock to be outstanding after this offering... 19,658,231 shares
Use of proceeds...................................... We intend to use the net proceeds from this
offering for working capital and other general
corporate purposes. See "Use of Proceeds."
Nasdaq National Market symbol........................ TZIX
</TABLE>
- ---------------
The number of shares of common stock outstanding after this offering is
based on shares outstanding on August 31, 1999.
This calculation excludes:
- 2,995,668 shares of common stock issuable upon exercise of options
outstanding under our stock option plan with a weighted average exercise
price of $1.30 per share (207,542 of these options were exercisable as of
August 31, 1999 and the balance are subject to future vesting
requirements).
Please see "Management -- 1998 Stock Option Plan" and "Description of
Capital Stock."
RECENT DEVELOPMENTS
In May 1999, we entered into an agreement with MedPartners, Inc. (now known
as Caremark Rx, Inc.) to provide information technology services to MedPartners
with respect to 67 physician groups representing approximately 1,780 physicians
while MedPartners terminates its relationships with these groups. In addition,
we purchased hardware, furniture and fixtures and a software license for
$2,350,000 from MedPartners and paid a software license transfer fee of
$280,000. According to public filings, MedPartners was in the business of
providing integrated healthcare services, including physician practice
management and pharmaceutical distribution and claims processing. MedPartners'
management independently decided to divest its physician practice management
operations. As part of this disassociation process, MedPartners began
outsourcing the information technology services for physician groups to third
party contractors through a competitive bidding process. We are not
participating in MedPartner's disassociation process, other than to indirectly
provide these information technology services to existing clients of
MedPartners. The initial term of the agreement expires on December 31, 1999, but
the agreement automatically renews for subsequent 30 day periods unless
MedPartners terminates it with 30 days written notice. MedPartners expects to
complete the disassociation process by December 31, 1999. As MedPartners
terminates its relationships with each group, we have the opportunity to enter
into a new multi-year contract with the group, specifically tailored to address
its information technology needs. We cannot assure you that as the
disassociation process continues, we will succeed in doing so.
We will lose revenue if we are not successful in entering into service
contracts directly with these disassociated groups to replace the information
technology services previously provided by MedPartners or if we are requested to
provide a reduced scope of services. As of August 31, 1999, groups representing
15% of the physicians we initially serviced under the MedPartners agreement had
chosen alternative providers of information technology services.
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We are pursuing the opportunity to provide customized application services
to 39 groups on an ongoing basis, representing approximately 1,523 physicians,
or 85% of the total physicians available at the time the MedPartners' agreement
was signed. As of August 31, 1999, we continued to provide services to
MedPartners with respect to 28 groups, representing approximately 808
physicians. Furthermore, we have negotiated multi-year contracts with 11
disassociated groups, representing approximately 715 physicians.
------------------------
TriZetto(SM), HealthWeb(TM), HW(TM) and design, Directory Studio(R),
MCIS(R), Without Integration There is Chaos(R), Access Manager(TM), Exchange
Manager(TM), Enterprise Manager(TM), Plan Manager(TM), CIO Workbench(TM), Data
Manager(TM), VIO(TM), Virtual Information Officer(TM)and enabling health e
business(SM) are our logos and are our trademarks or service marks. This
prospectus also includes the tradenames and trademarks of other companies whose
mention in this prospectus is with due recognition of and without intent to
misappropriate such names or marks.
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<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table summarizes the financial data for our business during
the periods indicated. The data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes and the
financial statements of our predecessor company, Croghan & Associates, Inc. and
related notes, included elsewhere in this prospectus.
Also, with respect to information relating to the number of shares used in
per share calculations and information relating to pro forma calculations,
please note the following:
- See Note 2 of Notes to Consolidated Financial Statements for an
explanation of the determination of the number of shares used in
computing basic and diluted net income (loss) per share.
- See Note 13 of Notes to Consolidated Financial Statements for an
explanation of the determination of the number of shares used in
computing pro forma net income (loss) per share.
- The pro forma information for the consolidated balance sheet data at June
30, 1999 represents the automatic conversion of all outstanding preferred
stock into 6,276,224 shares of common stock and adjusted to give effect
to the sale of 3,850,000 shares of common stock offered by us at the
initial public offering price of $9.00 per share and after deducting
estimated underwriting discounts and commissions and estimated offering
expenses. See "Use of Proceeds" and "Capitalization."
<TABLE>
<CAPTION>
THE TRIZETTO GROUP, INC.
----------------------------------------------------
CROGHAN & ASSOCIATES, INC. PERIOD FROM
---------------------------- MAY 27, 1997
NINE MONTHS (DATE OF SIX MONTHS ENDED
YEAR ENDED ENDED INCEPTION) TO YEAR ENDED JUNE 30,
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, ---------------------
1996 1997 1997 1998 1998 1999
------------ ------------- ------------- ------------ ----------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Total revenues.................. $ 5,088 $ 3,881 $2,519 $11,431 $ 5,053 $12,709
Gross profit.................... 1,020 272 847 3,974 1,807 3,562
Income (loss) from operations... (1,122) (2,143) 175 (16) 42 (675)
Income (loss) before
extraordinary item............ (2,442) (2,212) 103 60 32 (727)
Net income (loss)............... $(2,442) $(1,212) $ 103 $ 60 $ 32 $ (727)
Net income (loss) per share:
Basic......................... $ 0.05 $ 0.01 $ 0.01 $ (0.12)
====== ======= ======= =======
Diluted....................... $ 0.03 $ 0.00 $ 0.00 $ (0.12)
====== ======= ======= =======
Number of shares used in
computing net income (loss)
per share:
Basic......................... 2,065 4,937 5,066 6,216
====== ======= ======= =======
Diluted....................... 4,074 12,783 11,380 6,216
====== ======= ======= =======
Pro forma net income (loss) per
share:
Basic......................... $ 0.01 $ (0.06)
======= =======
Diluted....................... $ 0.00 $ (0.06)
======= =======
Number of shares used in
computing pro forma net income
(loss) per share:
Basic......................... 11,213 12,492
======= =======
Diluted....................... 16,171 12,492
======= =======
</TABLE>
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<TABLE>
<CAPTION>
THE TRIZETTO GROUP, INC.
CROGHAN & ------------------------------------------
ASSOCIATES, INC. AS OF JUNE 30, 1999
AS OF AS OF DECEMBER 31, ---------------------
DECEMBER 31, ------------------ PRO FORMA
1996 1997 1998 ACTUAL AS ADJUSTED
---------------- ------- -------- ------- -----------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 1,757 $ 773 $ 3,681 $ 4,033 $35,258
Total assets................................. 11,174 2,634 8,720 20,399 51,624
Total long-term debt and capital lease
obligations................................ 1,400 520 645 2,082 2,082
Mandatorily redeemable convertible preferred
stock...................................... -- -- 6,449 10,932 --
Total stockholders' equity (deficit)......... 7,819 563 (741) 86 42,243
</TABLE>
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RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the risks described below and the other information
contained in this prospectus before deciding to invest in our common stock. The
risks described below are not the only ones facing our company. Additional risks
not presently known to us or which we currently consider immaterial may also
adversely affect our company. If any of the following risks actually occur, our
business, financial condition and operating results could be materially
adversely affected. In such case, the trading price of our common stock could
decline, and you could lose part or all of your investment.
RISKS RELATED TO OUR BUSINESS
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, IT IS DIFFICULT TO EVALUATE OUR
BUSINESS.
We were incorporated in May 1997 and had revenue of $2.5 million for the
period from May 27, 1997 (date of inception) to December 31, 1997, $11.4 million
for the year ended December 31, 1998 and $12.7 million for the six months ended
June 30, 1999. Accordingly, we have a limited operating history. You must
consider the risks, uncertainties, expenses and difficulties frequently
encountered by companies in their early stages of development, particularly
companies in rapidly evolving markets. These risks and difficulties include our
ability to:
- respond effectively to the offerings of competitive providers of
healthcare information technology and services;
- increase awareness and market penetration of our brand;
- maintain our existing, and develop new, affiliate relationships;
- continue to develop and upgrade our technology; and
- attract, retain and motivate qualified personnel.
We depend on the continued demand for outsourcing of health information
technology services, on the growing use of the Internet for advertising,
commerce and communication and on favorable general economic conditions. We
cannot assure you that our business strategy will be successful or that we will
successfully address these risks or difficulties. If we should fail to
adequately address any of these risks or difficulties, our business would likely
suffer.
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 our third party software application vendors, including Epic
Systems, Inc., Medic Computer Systems, Inc., Medical Manager Corporation and
McKesson HBOC, Inc. 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. Our customer satisfaction is also dependent upon the functional uses
and reliability of the software, products and services of our application
vendors. We cannot assure you that the software, products or services of our
third party vendors will achieve 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 revenues 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
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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.
There are a variety of additional reasons why our relationships with our
software application vendors or our ability to establish relationships with
additional vendors may be impaired. Vendors may experience business difficulties
or enter into bankruptcy. Additionally, they may discontinue service and support
of products that we currently offer to our customers. Our software application
vendors may participate in industry consolidation which may impact the products
they offer, their support services and their willingness to do business with us.
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 depending on a number of factors,
not all of which are within our control. The variation in our quarterly
operating results could affect the market price of our common stock in a manner
which may be unrelated to our long-term operating performance.
Our services revenue in any quarter depends on our mix of consulting and
recurring revenue and our ability to meet project milestones and customer
expectations. To increase our revenue in any operating period, we must penetrate
new markets, expand within existing markets and develop new application and
service offerings required by our customers. Our operating results will be
harmed if we experience delays in developing new applications and services for
our customers or defects in our current applications.
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 revenues, and these expense levels are relatively fixed in the
short-term. If we have 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 suffer.
WE HAVE A LIMITED NUMBER OF CUSTOMERS AND RELATIVELY FIXED OPERATING COSTS, AND
IF OUR CUSTOMERS TERMINATE OR MODIFY EXISTING CONTRACTS OR EXPERIENCE BUSINESS
DIFFICULTIES, IT COULD ADVERSELY AFFECT OUR EARNINGS.
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 or with a number of smaller
customers could have a material adverse effect on our business, financial
condition and operating results.
As of August 31, 1999, we were providing services to approximately 80
customers. Based on our financial results for the month of August 1999, our
application services agreement with MedPartners represents approximately 39% of
our revenues and our professional services agreement with CCN Managed Care, Inc.
represents approximately 17% of our revenues. As of August 31, 1999, groups
representing 15% of the physicians we initially serviced under the MedPartners
agreement had chosen alternative providers of information technology services.
The initial term of the MedPartners agreement expires on December 31, 1999 and
our CCN agreement expires on May 4, 2002. Neither agreement ensures that we will
continue to receive significant revenues during the term of the agreement.
We believe that our long-term success largely depends upon our ability to
retain our customers and generate recurring revenues from contracts. 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
customers without long-term contracts.
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Many of our contracts are structured so that we generate revenue based on
units of volume, which include the number of physicians, number of patients,
number of members or number of users. If our customers experience business
difficulties and the units of volume decline or if that customer ceases
operations for any reason, we will generate less revenue under these contracts
and our operating results may be materially and adversely impacted.
WHEN OUR MEDPARTNERS AGREEMENT TERMINATES WE WILL LOSE REVENUE ASSOCIATED WITH
THAT AGREEMENT.
The initial term of the MedPartners Agreement expires on December 31, 1999,
but the agreement renews automatically for subsequent 30 day periods unless
MedPartners terminates it with 30 days prior written notice. Under the
MedPartners agreement, we agreed to provide information technology services to
MedPartners with respect to 67 groups representing approximately 1,780
physicians while MedPartners terminates its relationships with these groups. As
of August 31, 1999, we were providing application services to MedPartners with
respect to 28 groups and are pursuing the opportunity to provide customized
application services to 39 groups on an ongoing basis. At the time we entered
into the MedPartners agreement, we were aware that a number of groups were
actively seeking alternative information technology services. From May 1, 1999
to August 31, 1999, we have recognized revenues from MedPartners of $5.5 million
which constituted approximately 43% of our overall revenues during that period.
If we are not successful in entering into application services contracts
directly with the groups prior to disassociation we will lose this revenue,
which could have a material adverse effect on our business, financial condition
and operating results.
OUR SUCCESS DEPENDS ON OUR ABILITY TO ATTRACT, RETAIN AND MOTIVATE MANAGEMENT
AND OTHER SKILLED EMPLOYEES.
Our success will depend in large part on the continued services of key
management and skilled 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. We
currently maintain a $5,000,000 key man life insurance policy on Jeffrey H.
Margolis, our Chief Executive Officer. The loss of services of one or more of
our key management employees, or the inability to hire additional key management
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 skilled employees, the rate of turnover
may increase in the future. In addition, we expect to further grow our
operations, and our needs for additional skilled employees will increase. Our
continued ability to compete effectively in our business depends on our ability
to attract, retain and motivate these individuals.
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 June 1999, we had grown to approximately 300
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 acquire companies as part of our growth strategy. We compete with other
companies to acquire businesses. We expect this competition to continue to
increase, making it more difficult in the future to acquire suitable companies
on favorable terms.
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Although we may acquire additional companies, we may be unable to
successfully integrate them 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 in future
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.
WE EXPECT OUR LOSSES AND FLUCTUATIONS IN OPERATING RESULTS TO CONTINUE, WHICH
MAY ADVERSELY IMPACT OUR BUSINESS AND OUR STOCKHOLDERS.
We have lost money in two of our past nine fiscal quarters (through June
30, 1999). Although our revenue has grown in recent periods, we cannot assure
you that our revenues will continue at their current level or increase in the
future. We cannot assure you that we will be consistently profitable on either a
quarterly or annual basis.
We currently derive our revenue primarily from providing application
services and consulting services. We plan to invest heavily in acquisitions,
infrastructure development, applications development and sales and marketing. As
a result, we expect that we will lose money through at least 1999, and we may
never achieve or sustain profitability.
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, increase 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
our portal 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 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.
WE COULD LOSE CUSTOMERS AND REVENUE IF WE FAIL TO MEET THE PERFORMANCE STANDARDS
IN OUR CONTRACTS.
Many of our service agreements, including our agreement with MedPartners,
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 associated revenue could have a material
adverse effect on our business, financial condition and operating results.
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.
10
<PAGE> 13
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.
PERFORMANCE OR SECURITY PROBLEMS WITH OUR SYSTEMS COULD DAMAGE OUR BUSINESS.
Our customers' satisfaction and our business could be harmed if our
customers or we experience any system delays, failures or loss of data. We
currently process substantially all our customers' transactions and data at our
facilities in Englewood, Colorado and Birmingham, Alabama. Although we have
safeguards for emergencies and we have contracted backup processing for a
portion of our customers' critical functions, we do not have sufficient backup
facilities to process information if either or both of these facilities are not
functioning. 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
Internet connections from customers to our systems. These connections, in turn,
depend on the efficient operation of web browsers, Internet service providers
and Internet backbone service providers, all of 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.
DEFECTIVE PRODUCTS, ERRORS OR IMPROPER HANDLING OF CUSTOMER DATA MAY CAUSE US TO
LOSE CUSTOMERS OR SUBJECT US TO LIABILITY.
Our customers demand reliability in the delivery of application services
and quality when their transactions are processed. Although we devote
substantial resources to meeting these demands, errors may occur. Errors and
mistakes 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 could result in liability and penalties. Our services agreements generally
contain limitations on liability, and we maintain insurance with coverage limits
of $24 million 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.
IF WE DO NOT ADEQUATELY ADDRESS YEAR 2000 CONCERNS, WE MAY LOSE REVENUE OR INCUR
ADDITIONAL COSTS.
Many computer programs were designed and developed without considering the
upcoming change in the century, which could lead to failure of computer
applications or create erroneous results by or at the year 2000. This issue is
referred to as the "Year 2000" problem. It is possible that our computer
systems, software products or other business systems, or those of our vendors or
customers, could malfunction as a result of the Year 2000 problem. In addition,
telecommunications and utility services which are important to our operations
could malfunction due to the Year 2000 problem. We have conducted a review of
our business systems, including computer systems, in an attempt to identify ways
in which these systems could be affected by the Year 2000 problem. Based on this
review, we do not expect the Year 2000 problem will have a material adverse
effect on our systems. Despite our efforts, there is always a possibility that
we may not identify and correct all Year 2000 problems.
11
<PAGE> 14
As a result of the Year 2000 problem, many of our customers may suffer
delays in reimbursement from Medicare and Medicaid programs, other federal and
state healthcare programs and other third party payers. Such delays may also
damage us. We may not be able to identify, successfully remedy or assess all
date handling problems in our business systems or operations or those of our
customers and vendors.
WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS IN OUR CHARTER AND IN OUR CONTRACTS
THAT COULD DELAY OR PREVENT AN ACQUISITION OF OUR COMPANY, EVEN IF SUCH AN
ACQUISITION WOULD BE BENEFICIAL TO OUR STOCKHOLDERS.
Certain provisions of our certificate of incorporation, our bylaws,
Delaware law and our contracts could delay or prevent a third party from
acquiring us, even if doing so might be beneficial to our stockholders. Some of
these provisions:
- authorize the issuance of preferred stock which can be created and issued
by the board of directors without prior stockholder approval, commonly
referred to as "blank check" preferred stock, with rights senior to those
of common stock;
- prohibit stockholder action by written consent;
- establish a classified board of directors; and
- require advance notice for submitting nominations for election to the
board of directors and for proposing matters that can be acted upon by
stockholders at a meeting.
RISKS RELATED TO THIS OFFERING
SINCE WE HAVE BROAD DISCRETION IN HOW WE USE THE PROCEEDS FROM THIS OFFERING, WE
MAY USE THE PROCEEDS IN WAYS WITH WHICH YOU DISAGREE.
We have not allocated specific amounts of the net proceeds from this
offering for any specific purpose. Accordingly, our management will have
significant flexibility in applying the net proceeds of this offering. The
failure of our management to use such funds effectively could have a material
adverse effect on our business, financial condition and operating results.
THE LIQUIDITY OF OUR COMMON STOCK IS UNCERTAIN SINCE IT HAS NOT BEEN PUBLICLY
TRADED.
There has not been a public market for our common stock. We cannot predict
the extent to which investor interest in our company will lead to the
development of an active, liquid trading market. Active trading markets
generally result in lower price volatility and more efficient execution of buy
and sell orders for investors. The initial public offering price for the shares
will be determined by negotiations between us and the representatives of the
underwriters and may not be indicative of prices that will prevail in the
trading market.
OUR NEED FOR ADDITIONAL FINANCING IS UNCERTAIN AS IS OUR ABILITY TO RAISE
FURTHER FINANCING, IF REQUIRED.
We currently anticipate that our available cash resources combined with the
net proceeds from this offering will be sufficient to meet our anticipated
working capital and capital expenditure requirements for at least 12 months
after the date of this prospectus. We may need to raise additional funds,
however, to respond to business contingencies which may include the need to:
- fund more rapid expansion;
- fund additional marketing expenditures;
- enhance our operating infrastructure;
- respond to competitive pressures; or
- acquire complementary businesses or necessary technologies.
12
<PAGE> 15
We cannot assure you that additional financing will be available on terms
favorable to us, or at all. If adequate funds are not available or are not
available on acceptable terms, our ability to fund our operations, take
advantage of opportunities, develop products or services or otherwise respond to
competitive pressures could be significantly limited.
FUTURE FINANCING COULD ADVERSELY AFFECT YOUR OWNERSHIP INTEREST AND RIGHTS IN
COMPARISON WITH THOSE OF OTHER STOCKHOLDERS.
If additional funds are raised through the issuance of equity or
convertible debt securities, the percentage ownership of our stockholders will
be reduced, and these newly-issued securities may have rights, preferences or
privileges senior to those of existing stockholders, including those acquiring
shares in this offering.
MARKET PRICES OF EMERGING INTERNET COMPANIES HAVE BEEN HIGHLY VOLATILE, AND THE
MARKET FOR OUR STOCK MAY EXHIBIT VOLATILITY AS WELL.
The stock market has experienced significant price and trading volume
fluctuations, and the market prices of technology companies, particularly
Internet related companies, have been extremely volatile. Recent initial public
offerings by Internet companies have been accompanied by exceptional share price
and trading volume changes in the first days and weeks after the securities were
released for public trading. Investors may not be able to resell their shares at
or above the initial public offering price.
In the past, following periods of volatility in the market price of a
public company's securities, securities class action litigation has often been
instituted against that company. Such litigation could result in substantial
costs and a diversion of management's attention and resources.
FUTURE SALES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO DECLINE.
The market price for our common stock could drop as a result of sales of a
large number of shares of common stock in the market after the offering or the
perception that such sales could occur. These factors also could make it more
difficult for us to raise funds through future offerings of common stock.
There will be 19,658,231 shares of common stock outstanding immediately
after the offering. The shares sold in this offering will be freely transferable
without restriction or further registration under the Securities Act. Also,
additional shares of common stock issued upon exercise of options granted under
our stock-based compensation plans will become available for future sale in the
public market. Future sales of our common stock could cause our stock price to
decline.
In connection with the offering, officers, directors and certain
stockholders have agreed that, with certain exceptions, they will not sell any
shares of common stock or enter into similar transactions for 180 days after the
date of this prospectus without the consent of Bear, Stearns & Co. Inc.
NEW INVESTORS WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION IN THE TANGIBLE NET
BOOK VALUE OF THEIR SHARES.
We expect the initial public offering price to be substantially higher than
the net tangible book value per share of the common stock. The net tangible book
value of a share of common stock purchased at the initial public offering price
of $9.00 per share will be only $1.92. You may incur additional dilution if
holders of stock options, whether currently outstanding or subsequently granted,
exercise their options to purchase common stock.
MANY CORPORATE ACTIONS WILL BE SUBSTANTIALLY CONTROLLED BY OFFICERS, DIRECTORS
AND AFFILIATED ENTITIES REGARDLESS OF THE OPPOSITION OF OTHER INVESTORS TO
PURSUE AN ALTERNATIVE COURSE OF ACTION.
Our directors and executive officers beneficially own approximately 47%
(37% after completion of this offering) of our outstanding common stock. These
stockholders, if they acted together, could exert substantial control over
matters requiring approval by our stockholders. These matters would include the
13
<PAGE> 16
election of directors and the approval of mergers or other business combination
transactions. This concentration of ownership may also discourage, delay or
prevent a change in control of our company, which could have a material adverse
effect on our stock price. These actions may be taken even if they are opposed
by the other investors, including those who purchase shares in this offering.
RISKS RELATED TO OUR INDUSTRY
OUR BUSINESS WILL SUFFER IF COMMERCIAL USERS DO NOT ACCEPT INTERNET SOLUTIONS.
Our success depends in part on the adoption of Internet solutions by
commercial users. 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 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 portal 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.
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 AND
HEALTHCARE PORTALS.
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;
- sell additional services to our existing customer base;
- 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 potential competitors are larger and
offer broader services and have significantly greater financial, marketing and
other competitive resources than us.
14
<PAGE> 17
THE INTENSIFYING COMPETITION WE FACE FROM BOTH ESTABLISHED ENTITIES AND NEW
ENTRIES IN THE MARKET MAY ADVERSELY AFFECT OUR REVENUES 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:
- application service providers;
- healthcare e-commerce and portal companies;
- information technology outsourcing companies;
- information technology consulting firms; and
- healthcare information software vendors.
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 with whom
we have licensing agreements, may compete with us from time to time by selling
software on a stand alone 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.
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.
Healthcare organizations may react to these proposals and the uncertainty
surrounding such proposals in ways that could result in a reduction or deferral
in the use of our technologies and services. We cannot predict with any
certainty what impact, if any, such proposals or healthcare reforms might have
on our business, financial condition and operating results.
The United States Department of Health and Human Services has proposed
regulations regarding electronic signatures and the maintenance and transmission
of computer medical records. These regulations establish certain standards for
electronic record-keeping. We do not know if these regulations will be adopted
in their present form or a different form or at all. However, if these
regulations are adopted, they may require modifications to our computer software
and record-keeping practices. These changes may require us to make substantial
capital investments.
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 placed increased scrutiny on billing and collection practices of
healthcare providers and related entities and particularly on potential
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
15
<PAGE> 18
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.
The confidentiality of patient records is subject to substantial regulation
by state governments. These state laws and regulations govern both the
disclosure and the use of confidential patient medical record information.
Although compliance with these laws and regulations is at present principally
the responsibility of the physician or other healthcare providers, regulations
governing patient confidentiality rights are evolving rapidly. Additional
legislation governing the dissemination of medical record information has been
proposed at both the state and federal level. This legislation may require
holders of medical information to implement security measures and impose
restrictions on the ability of third party processors, like us, to transmit
certain patient data without specific patient consent. Any change in legislation
could restrict healthcare providers from using our services.
SINCE WE OPERATE AN INTERNET-BASED NETWORK, OUR BUSINESS IS SUBJECT TO
GOVERNMENT REGULATION RELATING TO THE INTERNET THAT COULD IMPAIR OUR OPERATIONS.
Because of the increasing use of the Internet as a communication and
commercial medium, the government has adopted and may adopt additional laws and
regulations with respect to the Internet covering such areas as user privacy,
pricing, content, taxation, copyright protection, distribution and
characteristics and quality of production and services. Any of these regulations
could have a material adverse effect on our business, financial condition and
operating results.
PROSPECTIVE CHANGES IN APPLICABLE ACCOUNTING STANDARDS COULD CHANGE THE WAYS WE
RECOGNIZE REVENUE AND COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS.
Prospective changes in the generally accepted accounting standards that
apply to our business, including revenue recognition policies and amortization
of charges associated with goodwill in acquisitions, could alter the way we
recognize revenue and have an adverse effect on our financial results.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. Forward-looking statements generally can be identified by the use
of forward-looking terminology such as "believes," "expects," "may," "will,"
"intends," "plans," "should," "seeks," "pro forma," "anticipates," "estimates,"
"continues," or other variations thereof (including their use in the negative),
or by discussions of strategies, opportunities, plans or intentions. Such
statements include but are not limited to statements under the captions "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business." A number of factors could
cause results to differ materially from those anticipated by such
forward-looking statements, including those discussed under "Risk Factors" and
"Business" and elsewhere in this prospectus.
In addition, such forward-looking statements are necessarily dependent upon
assumptions and estimates that may prove to be incorrect. Although we believe
that the assumptions and estimates reflected in such forward-looking statements
are reasonable, we cannot guarantee that our plans, intentions or expectations
will be achieved. The information contained in this prospectus, including the
section discussing risk factors, identifies important factors that could cause
such differences.
The cautionary statements made in this prospectus are intended to be
applicable to all related forward-looking statements wherever they appear in
this prospectus. We assume no obligation to update such forward-looking
statements or to update the reasons why actual results could differ materially
from those anticipated in such forward-looking statements.
16
<PAGE> 19
USE OF PROCEEDS
The net proceeds we will receive from the sale of the 3,850,000 shares of
common stock offered by us are estimated to be approximately $31,224,500 after
deducting the underwriting discounts and commissions and the estimated offering
expenses payable by us, based on the initial public offering price of $9.00 per
share. We will not receive any proceeds from the sale of the shares that Raymond
D. Croghan and his charitable remainder trust are selling. The primary purposes
of this offering are to take advantage of favorable market conditions to raise
additional equity capital, create a public market for our common stock and
facilitate future access to public markets.
We have no current specific plans for the net proceeds from this offering.
We generally intend to use the proceeds of this offering for the following:
- expansion of our sales and marketing activities;
- further development of application services and Internet technologies;
- acquisition of additional software licenses;
- expansion into additional geographic markets;
- enhancement of existing Customer Connectivity Centers; and
- working capital and other general corporate purposes.
We have not yet performed studies or determined the actual expenditures,
and thus cannot estimate the amounts to be used for each purpose discussed
above. The amounts and timing of these expenditures will vary significantly
depending on a number of factors, including, but not limited to, the amount of
cash generated by our operations and the market response to the introduction of
any new service offerings.
In addition, we may use a portion of the net proceeds of this offering to
acquire or invest in businesses, products, services or technologies
complementary to our current business, through mergers, acquisitions, joint
ventures or otherwise. However, we have no specific agreements or commitments
and are not currently engaged in any negotiations with respect to these
transactions. Accordingly, our management will retain broad discretion as to the
allocation of the net proceeds of this offering.
Pending the above uses, we intend to invest the net proceeds of this
offering in interest-bearing investment grade securities, including taxable
securities such as governmental securities, asset-backed securities, corporate
bonds and certificates of deposits and tax exempt securities such as municipal
bonds and notes.
DIVIDEND POLICY
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.
17
<PAGE> 20
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999,
- on an actual basis;
- on a pro forma basis to reflect automatic conversion of all outstanding
preferred stock into 6,276,224 shares of common stock upon the closing
of this offering; and
- on a pro forma basis as adjusted to reflect the sale of 3,850,000 shares
offered hereby at the initial public offering price of $9.00 per share,
after deducting the underwriting discounts and commissions and estimated
offering expenses payable by us.
This information should be read in conjunction with our financial
statements and the notes relating to those statements appearing elsewhere in
this prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1999
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- ---------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Total long-term debt and capital lease obligations...... $ 2,082 $ 2,082 $ 2,082
------- -------- --------
Mandatorily redeemable convertible preferred stock,
$0.001 par value, 10,391,608 shares authorized;
4,545,454 shares of Series A preferred stock and
1,730,770 shares of Series B preferred stock issued
and outstanding, actual; no shares issued and
outstanding pro forma and pro forma as adjusted....... 10,932 -- --
------- -------- --------
Stockholders' equity:
Common Stock, $0.001 par value, 30,000,000 shares
authorized, actual; 9,369,412 shares issued and
outstanding, actual; and 15,645,636 shares issued
and outstanding, pro forma; 40,000,000 shares
authorized pro forma as adjusted; 19,495,636 shares
issued and outstanding pro forma as adjusted....... 9 16 19
Additional paid-in capital............................ 8,092 19,017 50,239
Notes receivable from stockholders.................... (41) (41) (41)
Deferred stock compensation........................... (6,062) (6,062) (6,062)
Accumulated deficit................................... (1,912) (1,912) (1,912)
------- -------- --------
Total stockholders' equity......................... 86 11,018 42,243
------- -------- --------
Total capitalization............................... $13,100 $ 13,100 $ 44,325
======= ======== ========
</TABLE>
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<PAGE> 21
DILUTION
Our pro forma net tangible book value as of June 30, 1999, was $6.2 million
or $0.40 per share of common stock. Pro forma net tangible book value per share
is equal to our total tangible assets less total liabilities, divided by the pro
forma number of shares of common stock outstanding on June 30, 1999. Assuming
the sale by us of 3,850,000 shares of common stock at the initial public
offering price of $9.00 per share and after deducting the underwriting discounts
and the estimated offering expenses payable, our pro forma net tangible book
value at June 30, 1999 would have been $37.4 million, or $1.92 per share of
common stock. This represents an immediate increase in pro forma net tangible
book value of $1.52 per share to existing stockholders and an immediate dilution
of $7.08 per share to new investors. That is, after this offering, the excess of
our tangible assets over our liabilities on a per share basis will be less than
the purchase price paid for those shares by investors in this offering. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $9.00
Pro forma net tangible book value per share as of June 30,
1999................................................... $0.40
Pro forma increase in net tangible book value attributable
to new investors....................................... 1.52
-----
Pro forma net tangible book value per share after this
offering.................................................. 1.92
-----
Pro forma dilution per share to new investors............... $7.08
=====
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1999,
the total number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid by existing
stockholders and by new investors purchasing shares in this offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 15,645,636 80% $11,025,000 24% $ 0.70
New investors...................... 3,850,000 20 34,650,000 76 9.00
---------- --- ----------- ---
Total.................... 19,495,636 100% $45,675,000 100%
========== === =========== ===
</TABLE>
The foregoing table and calculations are based on shares outstanding on
June 30, 1999 and exclude:
- 2,801,128 shares of common stock issuable upon exercise of options
outstanding under our 1998 Stock Option Plan with a weighted average
exercise price of $0.74 per share (141,532 of these options were
exercisable as of June 30, 1999 and the balance are subject to future
vesting requirements); and
- 162,595 shares of common stock issuable upon exercise of warrants which
were exercisable as of June 30, 1999.
The foregoing table and calculations include 6,276,224 shares of common
stock issuable upon conversion of all outstanding shares of convertible
preferred stock.
Please see "Management -- 1998 Stock Option Plan" and "Description of
Capital Stock."
19
<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and related
notes included elsewhere in this prospectus. The statements of operations data
of Croghan & Associates, Inc., for the year ended December 31, 1996 and for the
nine months ended September 30, 1997 are derived from the audited financial
statements of Croghan & Associates, Inc. included elsewhere in this prospectus.
The consolidated statements of operations data of the Company for the period
from May 27, 1997 (date of inception) to December 31, 1997, for the year ended
December 31, 1998 and for the six months ended June 30, 1999 and the
consolidated balance sheet data as of December 31, 1997 and 1998 and June 30,
1999 are derived from the Company's audited consolidated financial statements
included elsewhere in this prospectus. The consolidated statement of operations
data of the Company for the six months ended June 30, 1998 is derived from
unaudited consolidated financial statements included elsewhere in this
prospectus. The balance sheet data of Croghan & Associates, Inc. as of December
31, 1996 is derived from unaudited financial statements not included in this
prospectus. In the opinion of management, the unaudited consolidated financial
statements include all adjustments, consisting principally of normal recurring
adjustments, necessary for a fair presentation of the results of operations for
the period. Historical results are not necessarily indicative of the results of
operations to be expected for future periods and the results of interim periods
are not necessarily indicative of the results for a full year.
<TABLE>
<CAPTION>
THE TRIZETTO GROUP, INC.
CROGHAN & ASSOCIATES, INC. --------------------------------------------------------
---------------------------- PERIOD FROM
NINE MONTHS MAY 27, 1997 SIX MONTHS ENDED
YEAR ENDED ENDED (DATE OF INCEPTION) YEAR ENDED JUNE 30,
DECEMBER 31, SEPTEMBER 30, TO DECEMBER 31, DECEMBER 31, ------------------
1996 1997 1997 1998 1998 1999
------------ ------------- ------------------- ------------ ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues:
Recurring revenue..................... $ 5,088 $ 3,881 $1,191 $ 5,300 $ 2,590 $ 6,201
Consulting revenue.................... -- -- 1,328 6,131 2,463 6,508
------- ------- ------ ------- ------- -------
Total revenues.......................... 5,088 3,881 2,519 11,431 5,053 12,709
------- ------- ------ ------- ------- -------
Costs of revenues:
Recurring revenue..................... 4,068 3,609 1,250 3,967 1,662 5,038
Consulting revenue.................... -- -- 422 3,490 1,584 4,109
------- ------- ------ ------- ------- -------
Total cost of revenues.................. 4,068 3,609 1,672 7,457 3,246 9,147
------- ------- ------ ------- ------- -------
Gross profit............................ 1,020 272 847 3,974 1,807 3,562
------- ------- ------ ------- ------- -------
Operating expenses:
Research and development.............. -- -- -- 1,083 592 440
Selling, general and administrative... 2,142 2,415 672 2,885 1,173 3,098
Amortization of deferred stock
compensation(1)..................... -- -- -- 22 -- 215
Write-off of acquired in-process
technology(2)....................... -- -- -- -- -- 484
------- ------- ------ ------- ------- -------
Total operating expenses................ 2,142 2,415 672 3,990 1,765 4,237
------- ------- ------ ------- ------- -------
Income (loss) from operations........... (1,122) (2,143) 175 (16) 42 (675)
Interest income......................... 21 15 15 210 60 76
Interest expense........................ (1,341) (84) (13) (52) (25) (100)
------- ------- ------ ------- ------- -------
Income (loss) before provision for
income taxes and extraordinary item... (2,442) (2,212) 177 142 77 (699)
Provision for income taxes.............. -- -- 74 82 45 28
------- ------- ------ ------- ------- -------
Income (loss) before extraordinary
item.................................. (2,442) (2,212) 103 60 32 (727)
Extraordinary item:
Gain on forgiveness of debt........... -- 1,000 -- -- -- --
------- ------- ------ ------- ------- -------
Net income (loss)....................... $(2,442) $(1,212) $ 103 $ 60 $ 32 $ (727)
======= ======= ====== ======= ======= =======
Net income (loss) per share(3):
Basic................................. $ 0.05 $ 0.01 $ 0.01 $ (0.12)
====== ======= ======= =======
Diluted............................... $ 0.03 $ 0.00 $ 0.00 $ (0.12)
====== ======= ======= =======
Number of shares used in computing net
income (loss) per share(3):
Basic................................. 2,065 4,937 5,066 6,216
====== ======= ======= =======
Diluted............................... 4,074 12,783 11,380 6,216
====== ======= ======= =======
Pro forma net income (loss) per
share(4):
Basic................................. $ 0.01 $ (0.06)
======= =======
Diluted............................... $ 0.00 $ (0.06)
======= =======
Number of shares used in computing pro
forma net income (loss) per share:
Basic................................. 11,213 12,492
======= =======
Diluted............................... 16,171 12,492
======= =======
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
CROGHAN & THE TRIZETTO GROUP, INC.
ASSOCIATES -----------------------------------
AS OF AS OF DECEMBER 31,
DECEMBER 31, ------------------ AS OF
1996 1997 1998 JUNE 30, 1999
------------ ------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 1,757 $ 773 $3,681 $ 4,033
Total assets.................................... 11,174 2,634 8,720 20,399
Total long-term debt and capital lease
obligations................................... 1,400 520 645 2,082
Mandatorily redeemable convertible preferred
stock......................................... -- -- 6,449 10,932
Total stockholder's equity (deficit)............ $ 7,819 $ 563 $ (741) $ 86
</TABLE>
- ---------------
(1) This expense relates to amortization of deferred stock compensation which
represents the difference between the deemed fair value of our common stock
and the exercise price of options at the date of grant. Deferred
compensation is amortized over the vesting period of the related options.
See Note 7 of Notes to Consolidated Financial Statements.
(2) In connection with the acquisition of Creative Business Solutions and
HealthWeb Systems, we wrote-off $484,000 of the total purchase price to
acquired in-process technology as technological feasibility of the HealthWeb
product had not been established. See Note 10 of Notes to Consolidated
Financial Statements for an explanation on the valuation of acquired
in-process technology.
(3) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used in computing basic and
diluted net income (loss) per share.
(4) See Note 13 Notes to Consolidated Financial Statements for an explanation of
the determination of the number of shares used in computing pro forma net
income (loss) per share.
21
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
our consolidated financial statements and notes included elsewhere in this
prospectus. This prospectus contains forward-looking consolidated statements
that involve risks and uncertainties. Our actual results could differ materially
from those discussed in such forward-looking statements. Factors that could
cause or contribute to such differences include those discussed below and in
"Risk Factors" and "Business."
OVERVIEW
We are a leading provider of remotely hosted third party and proprietary
software applications and related services for use in the healthcare industry.
We host software applications from leading software vendors, including Epic
Systems, Inc., Medic Computer Systems, Inc., Medical Manager Corporation and
McKesson HBOC, Inc., 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. HealthWeb is designed to facilitate the exchange of
information and to enable e-commerce among all constituents of the healthcare
industry. Through our Professional 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.
We were incorporated in Delaware in May 1997. In October 1997, we acquired
all of the outstanding shares of common stock of Margolis Health Enterprises,
Inc., an entity under our common control, in exchange for 3,716,667 shares of
our common stock. In October 1997, we also acquired all of the outstanding
shares of common stock of Croghan & Associates, Inc., an application services
provider, in exchange for 5,800,895 shares of our common stock.
In April 1998, we raised $6.0 million in gross proceeds by issuing
4,195,804 shares of our mandatorily redeemable convertible preferred stock to
two venture capital firms. In October 1998, we raised an additional $500,000 in
gross proceeds by issuing another 349,650 shares of our mandatorily redeemable
convertible preferred stock.
In February 1999, we simultaneously acquired Creative Business Solutions,
Inc., an Internet solutions development company, specializing in the integration
of healthcare information technology and contract programming solutions and
HealthWeb Systems, Ltd., an Internet software and portal development company,
specializing in customized healthcare applications, for a total consideration of
approximately $2.9 million, consisting of approximately $1.4 million of cash,
655,000 shares of our common stock, a two year note of $270,000 bearing interest
at 8% and acquisition costs of approximately $100,000.
In April 1999, we acquired certain assets and liabilities of Management and
Technology Solutions, Inc., a physician services organization, in exchange for
60,000 shares of our common stock. The assets acquired from Management and
Technology Solutions included property and equipment, intellectual property,
consisting of patents, trademarks and licenses, computer software and software
licenses. The liabilities assumed included lease obligations, a note payable for
a software license and other accrued liabilities.
In April 1999, we raised $4.5 million in gross proceeds by issuing
1,730,770 shares of mandatorily redeemable convertible preferred stock to three
venture capital firms.
In May 1999, we entered into an agreement with MedPartners, Inc. (now known
as Caremark Rx, Inc.) to provide hosted information technology services to
MedPartners with respect to 67 groups, representing approximately 1,780
physicians while MedPartners terminates its relationships with these groups. In
addition, we purchased hardware, furniture and fixtures and a software license
for $2,350,000 from MedPartners and paid a software license transfer fee of
$280,000. The initial term of the agreement
22
<PAGE> 25
expires on December 31, 1999, but the agreement automatically renews for
subsequent 30 day periods unless MedPartners terminates it with 30 days written
notice. MedPartners expects to complete the disassociation process by December
31, 1999. As MedPartners terminates its relationships with each group, we have
the opportunity to enter into a new multi-year contract with the group,
specifically tailored to address its information technology needs. We cannot
assure you that, as the disassociation process continues, we will succeed in
doing so.
We will lose revenue if we are not successful in entering into service
contracts directly with these disassociated groups replacing the information
technology services previously provided by MedPartners or if we are requested to
provide a reduced scope of services. As of August 31, 1999, groups representing
15% of the physicians we initially serviced under the MedPartners agreement have
chosen alternative providers of information technology services.
As of August 31, 1999, we continued to provide information technology
services to MedPartners with respect to 28 groups, representing approximately
808 physicians. Furthermore, we have negotiated multi-year contracts with 11
disassociated groups, representing approximately 715 physicians. We are pursuing
the opportunity to provide customized application services to 39 groups on an
ongoing basis, representing approximately 1,523 physicians, or 85% of the total
physicians available at the time the MedPartners' agreement was signed.
Our revenues are classified into two categories: recurring or multi-year
contractually based revenue, and revenue generated via consulting agreements.
Since inception, the relative percentages of consulting revenue and recurring
revenue were 52% and 48%, respectively. As we sign additional multi-year
application services contracts, we expect the relative percentage of recurring
revenue 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. Consulting revenue is billed on either a time and materials
or a fixed fee basis, and is recognized as the consulting 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 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.
As of the date hereof, we had recorded deferred compensation related to
options granted to employees in the total amount of $7.2 million, representing
the difference between the deemed fair value of our common stock, as determined
for accounting purposes, and the exercise price of the options at the date of
grant. Of this amount, $22,000 had been amortized in 1998, and approximately
$643,000 had been amortized in the first nine months of 1999. Future
amortization of expenses arising out of options granted through the date hereof
is estimated to be $452,000 for the remaining three months of 1999, $1.8 million
for the year ended December 31, 2000, $1.8 million for the year ended December
31, 2001, $1.8 million
23
<PAGE> 26
for the year ended December 31, 2002, and $715,000 for the year ended December
31, 2003. We amortize the deferred compensation charge over the vesting period
of the underlying option.
The acquisition of Creative Business Solutions and HealthWeb Systems 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 $2.5 million, of which $484,000 was allocated to
acquired in-process technology, based upon an independent appraisal, and was
written-off in the six months ended June 30, 1999, and $2.1 million was
allocated to goodwill and intangible assets consisting of assembled workforce
and Creative Business Solutions customer lists. The HealthWeb product is
designed to solve problems for hospitals, health plan administrators and
insurance providers, such as office administration activities, connectivity to
health plans and communications with patients. Payers will use HealthWeb for
information exchange with providers and members, such as eligibility,
authorizations, referrals, benefit verification, claims status and patient
record information. At the date of acquisition, we determined the technological
feasibility of HeathWeb's product was not established. We expect to introduce
the final product by year end 1999. Approximately $650,000 in research and
development had been spent up to the date of acquisition in an effort to develop
the technology to produce a commercially viable product. The future research and
development expense associated with the in-process product was estimated to be
approximately $975,000 between July 1999 and the first quarter of 2000.
Currently, we know of no developments which would lead us to change our original
assessment of the expected completion and commercial viability of this project.
Risks in completing this project on a timely basis include employee retention
and hiring practices or diverting resources to other projects. Risks which may
affect the commercialization of this product include new technologies or new
products which may make our product obsolete. At the date of acquisition, the
only identifiable intangible assets acquired were the technology under
development, the acquired workforce and the customer lists.
The valuation methodology used included an analysis and estimation of the
fair market value and remaining economic life of both the core and in-process
technologies on a going concern basis. The valuation of the business enterprise
and the acquired in-process technology were developed by discounting projected
future net cash flows at a 35% discount rate; this reflects both the return
requirements of the market and risks inherent in the investment.
These cash flow projections of the acquired entities assume that revenue
will peak in 2002, before declining in 2003. Specifically, the revenue growth
rate assumed from 1999 to 2000 is 125%, from 2000 to 2001 is 100%, and from 2001
to 2002 is 70%. From 2002 to 2003, we anticipated that revenues will decline by
40% due to product obsolescence as future, unidentified products replace our
in-process products. There can be no assurances that these projections will be
met.
24
<PAGE> 27
OPERATING DATA
The following table combines the operating data of Croghan & Associates for
the nine months ended September 30, 1997 and TriZetto for the period from May
27, 1997 (date of inception) to December 31, 1997 in order to facilitate
management's discussion of financial results. Certain costs and expenses
presented in the statement of operations data of Croghan & Associates represent
allocations and management estimates. As a result, the statement of operations
data presented for Croghan & Associates is not strictly comparable to those of
subsequent periods and may not be indicative of the results of operations that
would have been achieved had the Croghan & Associates business operated as a
non-affiliated entity during such period.
OPERATING DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------------------------
TRIZETTO
CROGHAN & ASSOCIATES MAY 27, 1997
NINE MONTHS ENDED (DATE OF INCEPTION)
SEPTEMBER 30, 1997 TO DECEMBER 31, 1997 COMBINED
-------------------- --------------------- --------
<S> <C> <C> <C>
Revenue
Recurring revenue.......................... $ 3,881 $1,191 $ 5,072
Consulting revenue......................... 0 1,328 1,328
------- ------ -------
Total revenues............................... 3,881 2,519 6,400
Cost of revenue
Recurring revenue.......................... 3,609 1,250 4,859
Consulting revenue......................... 0 422 422
------- ------ -------
Total cost of revenue........................ 3,609 1,672 5,281
Cost of revenues............................. 3,609 1,672 5,281
------- ------ -------
Gross profit................................. 272 847 1,119
Operating expenses:
Selling, general and administrative........ 2,415 672 3,087
------- ------ -------
Income (loss) from operations................ (2,143) 175 (1,968)
Interest income.............................. 15 15 30
Interest expense............................. (84) (13) 97
------- ------ -------
Income (loss) before provisions for income
taxes and extraordinary item............... (2,212) 177 (2,035)
Provisions for income taxes.................. -- 74 74
------- ------ -------
Income (loss) before extraordinary item...... (2,212) 103 (2,109)
Extraordinary item:
Gain on forgiveness of debt................ 1,000 -- (1,000)
------- ------ -------
Net income (loss)............................ $(1,212) $ 103 $(1,109)
======= ====== =======
</TABLE>
RESULTS OF OPERATIONS
Six months ended June 30, 1999 compared to six months ended June 30, 1998
REVENUES. Total revenues in 1999 increased $7.6 million, or 152%, to $12.7
million from $5.1 million in 1998. The majority of this increase was due to the
overall growth in both recurring revenue and consulting revenue throughout the
six month period ended June 30, 1999. Additionally, the acquisition of Creative
Business Solutions and HealthWeb Systems in February 1999 generated
approximately $1.5 million in incremental revenue for the first six months of
1999.
25
<PAGE> 28
Recurring revenue in 1999 increased $3.6 million, or 139%, to $6.2 million
from $2.6 million in 1998. Of this increase, $3.0 million represented the
incremental revenue generated as a result of our May 1999 agreement to provide
hosted information technology services to MedPartners with respect to 67 groups.
The remaining increase was primarily due to obtaining our first hosted managed
care application services customer in March 1999.
Consulting revenue in 1999 increased $4.0 million, or 164%, to $6.5 million
from $2.5 million in 1998. This increase reflected an overall increase in demand
for our consulting services throughout the first six months of 1999.
COST OF REVENUES. Cost of revenues in 1999 increased $5.9 million, or
182%, to $9.1 million from $3.2 million in 1998. This increase was due to the
costs incurred to support the overall expansion of our business, including our
acquisition of Creative Business Solutions and HealthWeb Systems in February
1999. As a percentage of total revenues, cost of revenues approximated 72% in
1999 and 64% in 1998.
Cost of recurring revenue in 1999 increased $3.3 million, or 203%, to $5.0
million from $1.7 million in 1998. 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 MedPartners contract signed in May 1999. Additionally,
incremental infrastructure costs were 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 81% in 1999 and 64% in 1998.
Cost of consulting revenue in 1999 increased $2.5 million, or 159%, to $4.1
million from $1.6 million in 1998. This increase was due to incremental costs
required to support increasing demand for our consulting services in the first
six months of 1999. As a percentage of consulting revenue, cost of consulting
revenue approximated 63% in 1999 and 64% in 1998.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased $152,000, or 26%, to $440,000 from $592,000 in 1998. The decrease was
due to Year 2000 remediation of our owned software in 1998 that is used in the
provision of application service to our customers; these Year 2000 research and
development costs were not incurred in 1999. 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 3% in 1999 and 12% in
1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in 1999 increased $1.9 million, or 164%, to $3.1 million
from $1.2 million in 1998. 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 24% in 1999 and 23% in 1998.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. Amortization of deferred
stock compensation increased $215,000 in 1999 from $0 in 1998. 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.
WRITE OFF OF ACQUIRED IN-PROCESS TECHNOLOGY. Our acquisition of Creative
Business Solutions and HeathWeb 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 the six months ended June 30, 1999.
INTEREST INCOME. Interest income in 1999 increased $16,000, or 27%, to
$76,000 from $60,000 in 1998. The increase was due to the incremental cash
invested in 1999 resulting from $4,500,000 in gross
26
<PAGE> 29
proceeds we raised in April 1999, and the full six month impact of our investing
approximately $6,000,000 in gross proceeds we raised in April 1998.
INTEREST EXPENSE. Interest expense in 1999 increased $75,000, or 300%, to
$100,000 from $25,000 in 1998. The increase is due to interest paid on notes
payable issued in February 1999 in connection with our purchase of HealthWeb and
Creative Business Solutions, and notes payable in connection with our purchase
of software applications licenses.
PROVISION FOR INCOME TAXES. Provision for income tax in 1999 decreased
$17,000, or 38%, to $28,000 from $45,000 in 1998. The decrease was primarily due
to a decrease in tax deductions for book purposes in 1999 which were not
recognizable for tax purposes.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE COMBINED YEAR ENDED DECEMBER 31,
1997
REVENUES. Total revenues in 1998 increased $5.0 million, or 79%, to $11.4
million from $6.4 million in 1997. This increase was primarily due to a full
year of consulting service revenue in 1998 as compared to seven months of
consulting service revenue in 1997.
Recurring revenue in 1998 increased $200,000, or 4%, to $5.3 million from
$5.1 million in 1997. Consulting revenue in 1998 increased $4.8 million, or
362%, to $6.1 million from $1.3 million in 1997. This increase was primarily the
result of the recognition of a full year of consulting revenue in 1998, with
approximately seven months of consulting revenue recognized in 1997, 1998
consulting revenues also reflected the growth and demand for our consulting
services from our inception in May 1997 through the year ended December 31,
1998.
COST OF REVENUES. Cost of revenues in 1998 increased $2.2 million, or 41%,
to $7.5 million from $5.3 million in 1997. As a percentage of total revenues,
cost of revenues approximated 65% in 1998 and 83% in 1997.
Cost of recurring revenue in 1998 decreased $900,000, or 18%, to $4.0
million from $4.9 million in 1997. This decrease was primarily the result of the
elimination of amortization of internally developed software as of the date of
the acquisition of Croghan & Associates on October 1, 1997. As a percentage of
recurring revenue, cost of recurring revenue approximated 75% in 1998 and 96% in
1997.
Cost of consulting revenue in 1998 increased $3.1 million, or 727%, to $3.5
million from $422,000 in 1997. This increase was primarily the result of a full
year of consulting operations occurring in 1998 with approximately seven months
of consulting operations occurring in 1997. The 1998 increase also reflected the
costs required to support the growing business demands for our consulting
services during that period. As a percentage of consulting revenue, cost of
consulting revenue approximated 57% in 1998 and 32% in 1997.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses,
which excluded development expenses that were included in cost of revenues, in
1998 increased to $1.1 million from $0 in 1997. The increase was primarily due
to Year 2000 remediation of our owned software that is used in the provision of
application services to our customers. As a percentage of total revenues,
research and development expense approximated 9% in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in 1998 decreased $202,000, or 7%, to $2.9 million from
$3.1 million in 1997. During 1997, Croghan & Associates had recognized
approximately $350,000 of amortization expense related to goodwill. This expense
was eliminated as of the acquisition of Croghan & Associates on October 1, 1997.
As a percentage of total revenues, selling, general and administrative expenses
approximated 25% in 1998 and 48% in 1997.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. Amortization of deferred
stock compensation increased $22,000 in 1998 from $0 in 1997. 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.
27
<PAGE> 30
INTEREST INCOME. Interest income in 1998 increased $180,000, to $210,000
from $30,000 in 1997. The increase was due to incremental cash available for
investments resulting from approximately $6,000,000 in gross proceeds raised in
the April 1998 private financing.
INTEREST EXPENSE. Interest expense in 1998 decreased $45,000, or 46%, to
$52,000 from $97,000 in 1997. The decrease was due to the forgiveness of $1.0
million of debt in 1997.
PROVISION FOR INCOME TAXES. Provision for income tax in 1998 increased
$8,000, or 11%, to $82,000 from $74,000 in 1997. The increase was primarily due
to an increase in tax deductions for book purposes in 1998 not recognizable for
tax purposes.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO CROGHAN & ASSOCIATES FOR THE YEAR ENDED
DECEMBER 31, 1996
REVENUES. Total revenues in 1997 increased $1.3 million, or 26%, to $6.4
million from $5.1 million in 1996. This increase was primarily due to an
increase in consulting revenue recognized in 1997.
COST OF REVENUES. Cost of revenues in 1997 increased $1.2 million, or 30%,
to $5.3 million from $4.0 million in 1996. This increase was primarily due to
the increase in cost of revenue associated with the addition of consulting
resources.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in 1997 increased $1.0 million, or 44%, to $3.1 million
from $2.1 million in 1996. This increase was primarily due to an increase in
expenses as a result of staff growth in management and administrative support
areas and the expansion of office space.
INTEREST INCOME. Interest income in 1997 increased $9,000, or 43%, to
$30,000 from $21,000 in 1996. The increase was due to incremental cash available
for investments primarily resulting from increased revenue associated with the
consulting practice.
INTEREST EXPENSE. Interest expense in 1997 decreased $1,244,000, or 93% to
$97,000 from $1,341,000 in 1996. The decrease was primarily due to the decrease
in financing required to operate the combined businesses in 1997.
PROVISION FOR INCOME TAXES. Provision for income tax in 1997 increased
$74,000 from zero in 1996. The increase was primarily due to an increase in
taxable income in 1997 as compared to a loss in 1996.
EXTRAORDINARY ITEM. In 1997, an extraordinary item was recorded for $1.0
million as compared to none for the same period in 1996. The extraordinary item
was related to the forgiveness of debt in the amount of $1.0 million by a
financing institution.
28
<PAGE> 31
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited consolidated statements of
operations data for the six quarters ended June 30, 1999. This data has been
derived from unaudited 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 financial statement and
the attached notes. The operating results for any quarter are not necessarily
indicative of the results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1998 1998 1998 1998 1999 1999
--------- -------- ------------- ------------ --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues:
Recurring revenue................ $1,239 $1,351 $1,447 $1,263 $ 1,421 $4,780
Consulting revenue............... 1,079 1,384 1,951 1,717 2,832 3,676
------ ------ ------ ------ ------- ------
Total revenues..................... 2,318 2,735 3,398 2,980 4,253 8,456
------ ------ ------ ------ ------- ------
Cost of revenues:
Recurring revenue................ 688 974 1,119 1,186 1,318 3,720
Consulting revenue............... 783 801 924 982 1,700 2,409
------ ------ ------ ------ ------- ------
Total cost of revenues............. 1,471 1,775 2,043 2,168 3,018 6,129
------ ------ ------ ------ ------- ------
Gross profit....................... 847 960 1,355 812 1,235 2,327
------ ------ ------ ------ ------- ------
Operating expenses:
Research and development......... 319 273 257 234 206 234
Selling, general and
administrative................ 501 672 825 887 1,229 1,869
Amortization of deferred stock
compensation.................. -- -- 4 18 81 134
Write-off of in-process
technology.................... -- -- -- -- 484 --
------ ------ ------ ------ ------- ------
Total operating expenses........... 820 945 1,086 1,139 2,000 2,237
------ ------ ------ ------ ------- ------
Income (loss) from operations...... 27 15 269 (327) (765) 90
Interest income.................... 13 47 69 81 38 38
Interest expense................... 13 12 16 11 32 68
Income (loss) before provision for
income taxes..................... 27 50 322 (257) (759) 60
Provision for (benefit from) income
taxes............................ 16 29 186 (149) 30 (2)
------ ------ ------ ------ ------- ------
Net income (loss).................. $ 11 $ 21 $ 136 $ (108) $ (789) $ 62
====== ====== ====== ====== ======= ======
Net income (loss) per share:
Basic............................ $ 0.00 $ 0.00 $ 0.03 $(0.02) $ (0.15) $ 0.01
====== ====== ====== ====== ======= ======
Diluted.......................... $ 0.00 $ 0.00 $ 0.01 $(0.02) $ (0.15) $ 0.00
====== ====== ====== ====== ======= ======
Shares used in computing net income
(loss) per share:
Basic............................ 5,102 5,030 4,811 4,811 5,204 7,217
====== ====== ====== ====== ======= ======
Diluted.......................... 10,073 12,674 13,852 4,811 5,204 18,014
====== ====== ====== ====== ======= ======
</TABLE>
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Our recurring revenue during these periods, with the exception of the
quarter ended December 31, 1998, increased commensurately with the general
growth in our application services provider business from quarter to quarter.
Recurring revenue for the quarter ended December 31, 1998 decreased relative to
the two preceding quarters because we performed several one-time system
enhancement projects during those quarters. The cost of recurring revenue during
these periods increased commensurately with the overall growth in the
application services provider business.
Our consulting revenue during these periods, with the exception of the
quarter ended December 31, 1998, increased commensurately with the general
growth in our professional consulting services business. Consulting revenue
decreased in the quarter ended December 31, 1998 due to a lower number of
billing days in the quarter, resulting from an increase in holiday and vacation
days during this period. Cost of consulting revenue during these periods
increased commensurately with the general growth in the consulting business.
Research and development expenses in the 1998 quarters reflect a decline in
the Year 2000 remediation costs. Research and development expenses in 1999
represent costs associated with the development of our HealthWeb technology and
other software products. Sales, general and administrative costs reflect the
costs required to support general business growth trends over these periods.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS
MAY 27, 1997 ENDED JUNE 30,
(DATE OF INCEPTION) TO YEAR ENDED -----------------
DECEMBER 31, 1997 DECEMBER 31, 1998 1998 1999
---------------------- ----------------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net cash provided by (used in)
operations.............................. $236 $(1,314) $ (423) $ 1,739
Net cash provided by (used in) investing
activities.............................. 493 (750) (350) (5,202)
Net cash provided by financing
activities.............................. 44 4,972 4,944 3,815
---- ------- ------ -------
Net increase in cash and cash
equivalents............................. $773 $ 2,908 $4,171 $ 352
==== ======= ====== =======
</TABLE>
Since inception, we have financed our operations primarily through a
combination of cash from operations and private financings. The increase in
operating cash in the six months ended June 1999 was due primarily to growth in
our operations, specifically increases in net income after considering non-cash
expenses and normal fluctuations in working capital, increases in accounts
payable and accrued expenses, partially offset by an increase in accounts
receivable. The increase in cash used in operations for the year ended December
31, 1998 over the prior period was due to increases in accounts receivable and
other current assets due to general business growth, as well as an increase in
non-cash deferred revenue during the year.
The increase in cash used in investing activities in the six months ended
June 1999 was primarily the result of our acquisition of $2.6 million of
hardware, furniture and fixtures and software licenses from MedPartners in May
1999, our acquisition of $1.1 million of software licenses related to the
MedPartners agreement signed in May 1999, and the $1.3 million cash portion (net
of cash acquired) of our acquisition of HealthWeb and Creative Business
Solutions in February 1999. The increase in cash used in investing activities
for the year ended December 1998 over the prior period was primarily due to
acquisitions of $750,000 of property and equipment and software licenses in
1998, while in 1997, we acquired $614,000 in net cash as a result of our
acquisition of Croghan & Associates.
The decrease in cash provided by financing activities in the six months
ended June 1999 compared to the six months ended June 1998 was primarily the
result of gross proceeds raised in our April 1998 private financing of
$6,000,000, compared to the gross proceeds raised in our April 1999 private
financing of $4,500,000. The April 1999 proceeds were reduced by payments we
made totaling $698,000 to eliminate the line of credit assumed with the Creative
Business Solutions acquisition, to pay down notes payable and capital lease
obligations. The April 1998 proceeds were reduced by payments we made totaling
$1,048,000
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consisting of loans made to employees, to repurchase common stock from a former
employee and pay down notes payable. The increase in cash provided by financing
activities for the year ended December 1998 was primarily due to gross proceeds
of $6,500,000 raised in our private financings in April and October 1998, offset
by payments we made totaling $1,567,000 consisting of loans made to employees,
to repurchase common stock from a former employee and payments on notes payable
and capital lease obligations.
In March 1999, we entered into a revolving line of credit agreement with a
financial institution. The total amount available for borrowings under the line
of credit is $1,500,000 and expires in March 2000. Borrowings under the line of
credit bear interest at the bank's prime rate plus 0.5% (8.75% as of August 31,
1999). 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 June 30, 1999 and
August 31, 1999, there were no outstanding borrowings on the line of credit.
We believe existing cash balances, cash generated from operations, future
borrowings under our line of credit and the proceeds from this offering will be
sufficient to meet our working capital and capital requirements for at least the
next 12 months.
IMPACT OF THE YEAR 2000
Many currently installed computer systems and software products are written
using two digits rather than four to define the applicable year. These systems
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations causing disruptions of
operations for any company using such computer systems or software, including,
among other things, a temporary inability to process transactions, send invoices
or engage in normal business activities. As a result, many companies' computer
systems may need to be upgraded or replaced in order to avoid this "Year 2000"
issue.
STATE OF READINESS. We are a fairly new enterprise, and, accordingly, the
majority of the software and hardware we use to manage our business has been
purchased or developed by us since inception. Generally, hardware and software
design within the current decade and the past several years in particular has
considered the Year 2000 issue. All of the software codes we have internally
developed to manage our network traffic is written with four digits to define
the applicable year.
RISKS. Testing has been completed on our internal information technology
systems and non-information technology systems. All of the testing has either
been performed by our own personnel or by the original software vendors. We
believe that such software is Year 2000 compliant.
In addition to our internally developed software, we use and license
software and hardware developed by third parties. To date, we have not done any
testing of such third party software or hardware to determine Year 2000
compliance. We have, however, obtained certifications from our key suppliers of
hardware and networking equipment for our data centers that such hardware and
networking equipment is Year 2000 compliant. These certifications provide
assurance that our hardware and networking equipment are Year 2000 compliant,
but may not provide grounds for legal recourse should the certifications prove
to be incorrect. Additionally, we have received assurances from the providers of
key software applications that their software is Year 2000 compliant. Based upon
an initial evaluation of our broader list of software and hardware providers, we
are aware that all of these providers are in the process of reviewing and
implementing their own Year 2000 compliance programs, and we will work with
these providers to address the Year 2000 issue and continue to seek assurances
from them that their products are Year 2000 compliant.
We also rely on third party network infrastructure providers to gain access
to the Internet. If such providers experience business interruptions as a result
of their failure to achieve Year 2000 compliance, our ability to provide
Internet connections could be impaired, which could have a material adverse
effect on our business, results of operations and financial condition. According
to a June 1999 article in Health Data
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<PAGE> 34
Management, the healthcare industry is one of the least prepared industries in
the United States. Industry sources cited in this article claim that healthcare
software application vendors will discontinue distribution of as many as 1,000
software applications that are not Year 2000 compliant. In addition, many
healthcare providers and payors have encountered difficulties when trying to get
vendors to respond to Year 2000 compliance inquiries. Many of our customers in
the healthcare industry are not Year 2000 compliant, and the impact of
widespread customer failure on our systems is difficult to determine. Customer
difficulties due to Year 2000 issues could interfere with healthcare
transactions or information, which might expose us to significant potential
liability. If customer failures result in the failure of our systems, it could
have a material adverse effect on our business, financial condition and
operating results. Furthermore, the purchasing patterns of these customers or
potential customers may be affected by Year 2000 issues as companies expend
significant resources to become Year 2000 compliant. The costs of becoming Year
2000 compliant for current or potential customers may result in reduced funds
being available to purchase and implement our applications and services.
COSTS. We have incurred approximately $650,000 to date, and we do not
anticipate that any future costs associated with our Year 2000 remediation
efforts will be material. However, if our customers, our providers of hardware
and software, our third party network providers or we fail to remedy any Year
2000 issues, our services and various transactions could be interrupted and we
could experience a material loss of revenues that could have a material, adverse
effect on our business, financial condition and operating results. We would
consider such an interruption to be the most reasonably likely unfavorable
result of any failure by us, or failure by the third parties upon which we rely,
to achieve Year 2000 compliance. Presently, we believe we are unable to
reasonably estimate the duration and extent of any such interruption or quantify
the effect it may have on our future revenues.
CONTINGENCY PLAN. We have yet to develop a comprehensive contingency plan
to address the issues that could result from such an event. We are prepared to
develop such a plan if our ongoing assessment leads us to conclude we have
significant exposure based upon the likelihood of such an event. See "Risk
Factors -- If we do not adequately address Year 2000 concerns, we may lose
revenue or incur additional costs."
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, "Software for Internal Use,"
which provides guidance on accounting for the cost of computer software
developed or obtained for internal use. SOP No. 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. We do not expect
that the adoption of SOP No. 98-1 will have a material impact on our
consolidated financial statements.
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.
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 June 30,
1999, we have not used derivative instruments or engaged in hedging activities.
The interest payable on our $1.5 million credit facility is variable based
on the prime rate, and, therefore, affected by changes in market interest rates.
Although as of June 30, 1999, the amount outstanding on our credit facility was
zero, letters of credit approximating $125,000 had been written
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against the credit facility. The line of credit expires in March 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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<PAGE> 36
BUSINESS
THE COMPANY
We enable electronic business for the healthcare industry as a software
application services provider and a healthcare Internet portal, supported by our
professional consulting services. By combining hosted software applications with
the various uses of the Internet, we provide a complete technology solution for
our customers in the healthcare industry. Our customers primarily include
healthcare provider groups, physician practice management companies and managed
care organizations such as health maintenance organizations, preferred provider
organizations and third party administrators. By offering our software and
services on a hosted, outsourced basis, we are able to provide our customers
with comprehensive and cost predictable services with guaranteed service
quality, typically through multi-year contracts. By managing our customers'
information technology environments, we eliminate their need to manage and
support their own computer systems, networks and software, therefore allowing
them to concentrate on their primary business.
We are a leading provider of remotely hosted third party packaged and
proprietary software applications and related services for use in the healthcare
industry. Through our Customer Connectivity Centers, we remotely operate and
maintain applications for our customers on most of the widely used computing,
networking and operating platforms. We provide access to our hosted applications
either across the Internet or across traditional networks. Our proprietary
solutions and methods enable our customers to access our hosted applications
using leading internet browsers. We have acquired rights to deploy numerous
commercially available software applications from a variety of healthcare
software vendors, including Epic Systems, Inc., Medic Computer Systems, Inc.,
Medical Manager Corporation and McKesson HBOC, Inc.
HealthWeb, our branded healthcare Internet portal which is currently being
used by a test group of providers and is in full use by a number of payers, is
designed to facilitate the exchange of information and to enable e-commerce
among all constituents of the healthcare industry. HealthWeb is also designed to
integrate and deliver the software applications that we host for our customers
though an easy-to-use common Internet browser interface. We plan to promote our
HealthWeb brand in order to establish its reputation as a leading healthcare
e-commerce portal.
HealthWeb is tailored to specifically address the requirements of
individual users which we expect will include most types of healthcare
professionals and administrative staff. Currently, providers use HealthWeb for
day to day office administration activities, access to health plans and
communications with patients. Currently, payers use HealthWeb for information
exchange with providers and members. We are working with our key users to
develop additional functions and we expect to deploy additional functional uses
as developed.
Our Professional Services Group helps our customers become more efficient
in applying and using their information technology. We use our proprietary
methodologies to identify information technology solutions which are suitable
for our customers. In many cases, these solutions include software applications
hosted in our Customer Connectivity Centers as well as our HealthWeb
technologies. Our Professional Services Group implements selected solutions for
which we may provide ongoing application services and support.
Our senior management team averages approximately 14 years of healthcare
industry experience. In addition, many members of our board of directors and
management team have been responsible for comprehensive execution of information
technology functions at leading healthcare entities representing millions of
covered-lives and thousands of physicians. Our comprehensive understanding of
healthcare business processes, and our experience in the use and delivery of
information technologies, enables us to reliably deliver complex hosted software
applications and information technology services while maintaining customer
satisfaction.
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As of August 31, 1999, we served approximately 80 customers in
approximately 505 sites located throughout the United States. These customers
represent over 238,000 healthcare providers and make their services available to
over 40 million individuals.
INDUSTRY BACKGROUND
Information technology and the Internet are becoming increasingly important
and viable solutions in reducing the current cost burden in many industries. The
healthcare industry, because of its size, fragmentation, and dependence on
information exchange, is well suited to benefit from increased use of technology
solutions to manage complex data sets and control costs. We believe that the
tremendous functional uses available in legacy and newer applications, combined
with the Internet's ease-of-use, universal accessibility and growing acceptance,
will create an opportunity for more efficient collection, management,
communication and storage of healthcare data.
Current State of the Healthcare Industry
According to a Raymond James Healthcare Information Technology Report dated
May 26, 1999, healthcare is the single largest sector of the United States
economy, consuming approximately $1.2 trillion annually. This growth has been
fueled by factors including technological advances in the healthcare industry
and an aging population which requires and uses more healthcare resources on a
per capita basis. To serve this demand better, the United States healthcare
industry has shifted away from traditional fee-for-service indemnity plans into
health maintenance organizations and other managed healthcare benefit plans.
Payers have attempted to control costs through a variety of methods including
lowering reimbursement rates, restricting coverage for services, limiting access
to a select group of providers, negotiating discounts with healthcare providers,
and shifting the economic risk for the delivery of care to providers through
alternative reimbursement models, such as capitation and risk pools. Despite
managed healthcare payer organizations' attempts to reduce costs, there is
general acknowledgement that the cost of healthcare has once again begun to rise
by annual double-digit percentage increases.
The Healthcare Industry Report by Adams, Harkness & Hill, Inc. dated July
2, 1999 estimates that at least $250 billion, or 21% of every healthcare dollar,
is wasted through the delivery of unnecessary care, performance of unnecessary
or duplicate procedures and tests, or excessive administrative costs. We believe
that a portion of this wasteful spending is attributable to the inefficient
collection, management, sharing and storage of data. Currently, data reside on a
variety of incompatible computer systems. While these legacy systems are useful
in accomplishing site specific tasks, the inability of these systems and
applications to communicate with one another prevents the efficient, integrated
exchange of data. For example, providers often lack timely access to relevant
patient information resulting in unnecessary procedures and placing inherent
limitations on the physician's ability to diagnose and treat patients. Providers
and suppliers often exchange data manually, resulting in errors and delays in
determining eligibility, approving referrals, reporting test results and paying
claims.
We believe that these information technology issues contribute to the
rising cost of healthcare. As a result, the government and other purchasers of
healthcare increasingly have placed pressure on the healthcare industry to
improve the cost-effectiveness of healthcare while maintaining the quality of
care.
Demand for Application Services in Healthcare Information Technology
The healthcare information technology industry offers many of the solutions
necessary to improve the cost-effective delivery of healthcare services. Because
interactions between payers, providers, suppliers and consumers are very
complex, it is highly difficult to identify, implement and sustain an
appropriate combination of information technology solutions. We believe the
demand for outsourcing of healthcare information technology services is rising,
as providers and management teams struggle with the lack of strategy, personnel,
applications and technology infrastructure necessary to run their healthcare
entities. Even those healthcare entities with professional information
technology personnel are challenged to create economies of scale in the
deployment and ongoing support of required solutions. A recent CIO survey
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conducted by the Healthcare Information and Management Systems Society reported
that 80% of healthcare entities participating in the survey outsource at least
one major information technology function. The ongoing pressure to reduce
healthcare costs and improve quality results in healthcare management teams
seeking a rational, cost predictable information technology administrative
solution. Therefore, we expect that an increasing proportion of existing and new
healthcare information technology expenditures will be directed toward
application services providers on an outsourced basis.
Changing business models in healthcare are driving increasing demand for
application services. Healthcare provider organizations have agreed to perform
additional administrative business functions related to their assumption of risk
from payers. These functions include claims processing and referral processes
that require the integration of managed care software applications and
communication technologies not traditionally found in provider enterprises,
along with associated business processes (e.g., claims payment) to support them.
Application services providers experienced in managed care offer a rational
alternative to the in-house acquisition of seasoned managed care knowledgeable
business professionals, application software and hardware platforms to conduct
business services, and information technology professionals with sufficient
industry experience to implement and sustain these functions. An application
services provider can offer these services as an integrated offering on a
professionally managed, economical basis.
Another factor driving increased demand for application services is the
shortage of information technology professionals. Because of extreme margin
pressures, high industry complexity and generally slow adoption of new
information technologies, healthcare entities will continue to experience
significant challenges attracting and retaining top information technology
professionals. Healthcare organizations can mitigate the risks and challenges
relating to identifying, hiring and retaining information technology
professionals through the utilization of an application services provider.
We believe that increasing accountability to purchasers, along with direct
consumerism in healthcare is increasing the need for complete and accurate data
by both providers and payers. As organizations such as the National Committee on
Quality Assurance continue to develop standard methods for measuring and
reporting healthcare quality, service and financial results, paper-based systems
no longer suffice. Data from a variety of applications and business processes
must be gathered, stored, analyzed and reported in sophisticated data
warehousing environments. Accordingly, we believe that a series of hosted
applications in an application services environment, linked to a hosted data
warehousing environment presents a rational alternative to healthcare entities
developing their own in-house data warehousing and reporting environments.
Increasing Importance of the Internet in Healthcare
The Internet has rapidly become an important alternative to traditional
means of communication and commerce. The Internet's key attributes as an open,
accessible, low-cost and flexible technology make it particularly well suited
for the information technology and communication needs of the healthcare
industry. These attributes represent potential solutions to the limitations of
legacy systems, the fragmentation of data sources and the extreme dependence on
information in the healthcare industry. Specifically, the Internet's evolution
from a relatively simple platform for communicating and exchanging information
to a complex platform for the exchange of secure business to business
transactions allows it to provide a means of connecting the existing
transactional and information systems in place in the healthcare industry,
extending their utility and value. We believe that the Internet will ultimately
comprise the primary method of communication and commerce in the healthcare
industry.
Industry Challenges to Applying Information Technologies
Healthcare entities face shifting and uncertain operating models, frequent
governmental and regulatory changes, intense industry consolidation and
divestiture patterns, year 2000 challenges, and continuous margin pressures.
Even without these external forces, the size and complexity of the healthcare
industry causes the number of different software applications and technology
approaches to be extraordinary, as
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compared to other industries. The types of information technology solutions
required by any healthcare entity are dependent upon its range of operating
activities, and these requirements can shift quickly.
We believe that all healthcare entities must be competent in the following
three information technology areas:
- primary software applications and services;
- information access and reporting; and
- electronic communication infrastructure.
Primary software applications and services are required in order for
healthcare entities to conduct their day-to-day business. Most healthcare
entities require multiple software applications. The proper combination of
software applications can enable healthcare entities to operate more effectively
and efficiently. We host software applications which can be used for
communications, physician office practice management, billings and collections,
claims processing, accounting and other business functions. Some of the software
applications we host are Epic, Medic, Medical Manager, HBOC Amisys and Great
Plains.
Information access and reporting is required in order for healthcare
entities to gather and transform extensive data into useful information for
decision-making. The combination of appropriate software applications and
database technologies enable our customers to combine data from separate
programs and translate it into useful formats and reports. These tools enable
customers to ask questions of the data such as how many of their male patients
over the age of 40 have had a prostate screening test in the last year. We
facilitate our customers' information access and reporting by assisting them in
organizing their data into reporting databases which we host for them. The
combination of hosted reporting databases combined with software applications to
access and report on the data is referred to as our Data Manager offering.
An electronic communication infrastructure is required for healthcare
entities to communicate internally and externally over telephones, computer
networks and the Internet with their customers and suppliers, regulatory bodies
and other healthcare entities. Electronic communication is established via
telephone equipment, desktop devices, local area networks, wide-area networks,
the Internet and electronic data interchanges. We can provide the necessary
software and hardware which make up the necessary infrastructure. Our
proprietary tools, Access Manager, Exchange Manager, and HealthWeb establish
communications by transmitting instructions to computers that direct the
computers to make connections, transfer files and carry out other procedures.
Information intensive businesses, including healthcare entities, must be
competent in each of these three areas and also effectively integrate them into
a seamless information technology infrastructure. Moreover, the implementation
of these three information technology components must be cost-predictable so
that rational information technology investment decisions can be made. Finally,
healthcare entities that achieve proficiency in their internal use of
information technology are now challenged to allow customers and other
businesses to directly interact with their information technology solutions
through person-to-business and business-to-business e-commerce. The promise and
challenge of the Internet is that a common set of access and communication
standards will enable substantially higher efficiency than current methods. We
believe this vision can be realized when entities implement and integrate all
three information technology components in a disciplined manner.
OUR SOLUTIONS
Our solutions are capable of providing our customers with a complete,
professionally managed information technology system that includes end-to-end
desktop and network connections, primary software applications that help run
their day-to-day business, and information access and reporting capabilities to
aid in data analysis and decision support. Our solutions allow our customers to
integrate different applications and technologies, manage risk and control
costs. Our solutions, further enable our customers
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to take advantage of the high speed, universal access and ease of use of the
Internet. Our products and services provide our customers with the following
benefits:
- RAPID DEPLOYMENT AND FLEXIBILITY. By offering hosted software
applications which are typically already installed in our Customer
Connectivity Center, we are able to rapidly deploy solutions for our
customers. Most competing solutions require customers to purchase and
install complex and costly desktop, application and networking systems,
as well as load and test application software. This conventional approach
can be a highly time-consuming process. Rapid deployment of our products
and services is intended to allow customers to realize very rapid returns
on their information technology expenditures. We offer our customers a
large variety of widely used proprietary and non-proprietary software
applications without bias to any particular vendor's products, allowing
us to configure unique solutions tailored to each customer's needs.
- REASONABLE, PREDICTABLE COSTS. Our hosted software applications and
electronic communication infrastructure services are subscription-based,
and are billed monthly over the course of contracts that are generally
three to five years in length. The amount paid is based on easily
measurable and predictable units of volume such as number of physicians
or number of members. Most competitive software and systems sales require
customers to budget and incur significant capital expenditures to acquire
hardware, operating systems and application software, integration
consulting, communication services and training. In addition, customers
using in-house solutions are often required to purchase separate ongoing
maintenance contracts for all hardware and software, while also incurring
unpredictable costs for equipment repairs and upgrades. In contrast, our
solutions are typically allocated to operating rather than capital
budgets, allowing customers to receive a specified suite of services at a
predetermined monthly cost. Our solutions thereby afford customers
predictable costs which are consistent with their recognition of revenue.
- RELIABILITY AND SCALABILITY. We operate our Customer Connectivity
Centers on behalf of our customers on a 24 hours a day, seven days a week
basis and we employ an information technology management team and staff
of over 300 people who are experienced in high-volume production
healthcare environments. For most of our customers, the creation and
maintenance of a complete, professionally managed information technology
system is cost prohibitive. Our solutions and approach bring the benefits
enjoyed by the largest healthcare organizations to the remaining majority
of healthcare entities. Our centralized approach allows us to rapidly
expand our capacity as customer demands increase.
- LOWER IMPLEMENTATION RISK. In addition to employing a team experienced
in operating and supporting applications on a day-to-day basis, we employ
approximately 100 professionals who are skilled in implementing,
integrating and testing software applications using our proven methods
which we have learned from our experience in systems integration.
- EASE OF COMMUNICATION. We engineer desktop, networking and communication
solutions that enable our customers to run modern and legacy applications
from a single desktop device, across a common networking system. Most of
our customers do not employ technology professionals experienced in the
setup and networking of modern end-user devices like personal computers,
network computers and personal digital assistants. We maintain a
laboratory to continuously engineer and test third party end-user
devices, network servers and application servers, along with desktop and
network software releases, to ensure reliable access to and connection
with required data and applications.
- INTERNET ACCESS. Our customers are continuously connected to our
Customer Connectivity Centers via high-speed, high-bandwidth electronic
communications channels. This enables us to conveniently provide fast and
continuous Internet access to each connected desktop that utilizes our
Internet browser-based HealthWeb portal over that same communications
channel. Because our Customer Connectivity Centers maintain secure
high-speed connections to the Internet, we can offer our customers access
to informational and commercial transactions on a business-to-business
and business-to-person basis.
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- PRESERVATION OF EXISTING INVESTMENT IN LEGACY SYSTEMS. Our solutions
allow for the integration of different legacy systems and make such
systems more accessible to more users through common browser-based user
interfaces. Our solutions therefore allow customers to continue, and in
many cases enhance, the use of installed systems rather than replacing
them with costly new systems. This benefit is particularly attractive to
healthcare entities with significant capital already committed to legacy
information technology systems that lack the resources to commit
incremental capital.
- HEALTHCARE AND MANAGED CARE INDUSTRY EXPERTISE. Healthcare software
applications and their associated transactions and business processes
tend to be complex. Our operational management team is highly experienced
in conducting the information technology and business functions necessary
to allow our customers to be competitive in todays dynamic healthcare
industry.
OUR STRATEGY
Our objective is to enhance our position as a leading healthcare
application services provider and establish HealthWeb as a leading healthcare
Internet portal. We expect to achieve this objective by offering our customers
high quality, reliable, flexible and cost-effective software applications,
additional methods to more effectively use the Internet and professional
consulting services. The key elements of our strategy include:
- ATTRACTING NEW CUSTOMERS AND INCREASING PENETRATION OF EXISTING
CUSTOMERS. We plan to extend our market leadership by allocating
increased resources to sales, marketing and business development
functions. We will continue to use our Professional Services Group in
conjunction with our sales force to identify and secure new accounts,
penetrate our existing accounts and heighten the overall visibility of
our company in our markets.
- EXPANDING OUR SOFTWARE APPLICATION PORTFOLIO. We plan to aggressively
pursue relationships with additional software vendors and extend our
existing relationships in order to increase the size and scope of our
software application portfolio.
- DEVELOPING AND ACQUIRING ADDITIONAL INTERNET TECHNOLOGIES. We will focus
additional resources on the continued development of HealthWeb. We plan
to develop additional features and functions that will allow HealthWeb to
support a wider variety of e-commerce applications among a broader group
of healthcare entities. We also plan to augment HealthWeb's current
features and functions through the provision of additional content, some
of which may be acquired from third parties. In addition, we intend to
increase the linkages HealthWeb provides among local providers, health
plans, their members, ancillary service providers and suppliers.
- INCREASING PENETRATION OF HEALTHWEB. We intend to market HealthWeb to
both existing customers that do not currently use HealthWeb and to new
customers in order to increase as rapidly as feasible the number of
users. We view the parallel growth of HealthWeb's offerings, features and
functions with the growth in users as key to its ultimate success.
- PURSUING STRATEGIC ALLIANCES AND ACQUISITIONS. We plan to aggressively
expand our application services and HealthWeb offerings. We expect to do
so both through internal product development and marketing efforts, as
well as through strategic alliances and acquisitions. We will carefully
evaluate all strategic opportunities we encounter and pursue those which
are most compatible with our overall strategic objectives.
- ATTRACTING ADDITIONAL INFORMATION TECHNOLOGY AND INDUSTRY
PROFESSIONALS. We plan to hire and train additional information
technology and other multi-disciplinary professionals in order to meet
the increasing demands of our growing customer base.
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OUR PRODUCTS AND SERVICES
Application Services Provider
Our application services represent a subscription-based method for
customers to access all or any of the three required information technology
components (primary software applications, information access and reporting and
electronic communications infrastructure), along with supporting business
services. Our customers choose a combination of our product and service
offerings that best meet their business requirements, technical needs and
pricing requirements, and pay for the delivery of those services on a monthly
basis. Our software applications and information technology services provide our
customers with a simpler alternative as compared to the creation of an in-house
information technology function. Customers may use our applications and services
for all or a portion of their information technology and related business
service needs.
We expect to expand our product and service offerings as we continue to
develop relationships with additional software application vendors and
information technology service partners. The following chart depicts our current
software applications and services, classified by the primary information
technology component that is delivered.
Our licenses for the use of the third party software applications that are
included in the following chart are essential to the technology solutions we
provide for our customers. The material licenses we currently rely upon vary in
duration. Our Medic license is perpetual, subject to prospective termination in
the event of a material breach. Our Medical Manager and Great Plains licenses
are perpetual unless and until terminated by either party with proper notice.
Although the initial three year term of our Epic license expires on April 30,
2002, the license then becomes automatically renewable for one-year terms. The
Epic license may be prospectively terminated during any renewal term with 150
days notice prior to the end of the renewable term. We believe that the
durational terms of our software licenses are adequate for our current users of
these software applications and that additional licenses can be obtained if
needed.
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<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
CURRENT APPLICATION SERVICES PROVIDER OFFERINGS
- -----------------------------------------------------------------------------------------------------------------
PRODUCT/VENDOR KEY FUNCTIONS DELIVERED
- -----------------------------------------------------------------------------------------------------------------
ELECTRONIC COMMUNICATIONS INFRASTRUCTURE
- -----------------------------------------------------------------------------------------------------------------
<S> <C>
Access Manager A combination of hardware and software that allows the customer to access
and use numerous software applications
Exchange Manager Provides an interface that effectively translates data from different
software applications and enables them to communicate electronically
HealthWeb Enablement Provides the customer with an Internet browser-based overlay on software
applications which gives the customer ease of use through point and click
capabilities
- -----------------------------------------------------------------------------------------------------------------
PRIMARY APPLICATIONS AND SERVICES
- -----------------------------------------------------------------------------------------------------------------
PROVIDER APPLICATIONS
Enterprise Manager Software application that facilitates appointment scheduling, patient
registration, visitation tracking, insurance processing, patient bill
processing and includes a financial accounting module
Epic (various) Multiple software applications related to physician practice management
and financial control, including scheduling, collection of co-payments,
tracking of referrals and eligibility, billing and collections, medical
records, claims adjudication, accounting and others
+ Medic A practice management system that provides a solution for physicians and
group practices. It includes software applications that automate and
integrate financial, administrative, claims processing and electronic
medical records functions
Medical Manager Fully integrated physician practice management solution which offers
support for financial, administrative and clinical needs of physician
groups and other providers
- -----------------------------------------------------------------------------------------------------------------
PROVIDER BUSINESS SERVICES
Billing & Collections Through personnel located in our facilities, we perform billing and
collection functions on an outsourced basis
Claims Review Through personnel located in our facilities, we reconcile capitation
payments from insurance companies to medical groups and review claims paid
for appropriateness and contract terms on an outsourced basis
- -----------------------------------------------------------------------------------------------------------------
PAYER APPLICATIONS
Epic Tapestry Software application that automates the fundamental operations of managed
care by providing the following capabilities: enrollment, eligibility,
membership management, benefits tracking and inquiry, customer service,
referral authorization, provider credentialing, case management and others
Plan Manager Software application that includes benefit plan administration, enrollment
and eligibility, provider contracting, utilization/case management, claims
processing, billing and accounts receivable, customer service, accounting
and finance functions
HBOC Claimcheck A comprehensive auditing software system that automatically edits and
corrects billing errors to ensure claims are paid appropriately
HBOC Code Review An auditing tool which detects, corrects and documents improper coding of
claims by applying the American Medical Association's code criteria to all
physician services
HBOC Amisys A solution that addresses the information management needs of payor- and
provider-based organizations that have assumed the financial risk for
delivery of healthcare services. This application automates the critical
business functions necessary to operate or administer a variety of managed
care products
- -----------------------------------------------------------------------------------------------------------------
ADMINISTRATIVE APPLICATIONS
Great Plains General accounting and financial package designed for small to medium size
businesses
SAP General accounting and financial package designed for medium to large size
businesses
CIO Workbench A software program that helps manage and prioritize information services
projects
- -----------------------------------------------------------------------------------------------------------------
INFORMATION ACCESS & REPORTING
- -----------------------------------------------------------------------------------------------------------------
DATA MANAGER A data warehousing program that collects and manages data from different
sources
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
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HealthWeb Internet Portal
HealthWeb, our healthcare Internet portal, is currently being used by a
test group of providers and is in full use by a number of payors. We expect to
widely offer HealthWeb to other users by the end of 1999 after we develop
additional functions and features based on the feedback we receive from our
existing users. HealthWeb serves as a gateway for the exchange of healthcare
information and services across the Internet. HealthWeb is designed to enhance
single-point desktop access to a variety of application and information
resources required to run a healthcare entity. HealthWeb is designed primarily
for use by administrative support personnel who conduct the day-to-day business
and clinical operations of healthcare entities. These personnel represent the
vast majority of employees in healthcare entities.
After contracting with a new user, members of our Professional Services
Group install HealthWeb on the user's computer desktop and customize it per the
user's specific requests. For instance, the user can choose to have HealthWeb as
its default screen which appears when the computer is turned on. If the user
continues using its own default screen, HealthWeb appears as an icon which will
activate upon "pointing and clicking" on the icon. Once activated, HealthWeb
provides the user with a single screen view of the software applications and
information needed to perform daily tasks.
When using HealthWeb, the user sees various "point and click" choices on
the screen grouped under specific categories. For example, providers see
categories such as "Services," "Resources," "Facilities" and "Payers." Under
"Services," the provider can click a button labeled "Practice Management System"
which opens software applications such as Epic, Medic, or Medical Manager, and
allows the user to make appointments, process claims or review other
administrative data. Under "Resources," the provider can click a button labeled
"Medical Journals" which would take the user to an Internet site containing
medical information. Under "Facilities," the provider can click a button labeled
"Hospitals" which would produce a list of the hospitals, including phone numbers
or directions, which can be distributed to a patient. Under "Payers," the user
can click a button which contains the names of insurance carriers. This would
link the provider to the insurance carrier's systems over the Internet, which
would allow the provider to verify eligibility, benefits, referrals, claim
status and other information, as well as messaging with the health plan.
HealthWeb is designed to with work legacy healthcare applications which do
not have "point and click" view screens. We provide our users "point and click"
connection to software applications, whether they operate on new or legacy
platforms, using any standard Internet browser. 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 the Year 2000 issues. HealthWeb's proprietary enabling technology
to access and connect to these legacy systems allows us to maximize value to our
customers while minimizing risks of business interruption.
HealthWeb also allows customers unlimited Internet access to other
healthcare trading partners such as pharmacy and supply companies, to other
healthcare entities, to online healthcare data and information content services,
to healthcare organizations and associations, to education and training
resources and to individuals.
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For those customers who utilize our software applications and information
technology services, HealthWeb is designed to be the primary access method to
receive those services. For customers who do not utilize our applications and
services, HealthWeb is designed to co-exist with their existing software
applications and technology environments.
We anticipate that the number of offerings available through our HealthWeb
healthcare Internet portal will grow, as we continue to develop relationships
with additional Internet-capable service and content partners.
Professional Consulting Services
Our Professional Services Group consists of approximately 70 individuals
who are available to communicate with our customers on a daily basis to ensure
that our customers' information technology systems correspond with their
strategic business objectives. Our professional services personnel consult with
our customers from our office or travel and work at our customers' facilities.
Our consulting engagements may range from several days to many months. Our
services are either billed on a time and materials basis or upon a fixed rate
negotiated for a specific project.
We hire and develop professional services personnel from across the nation
to provide consulting services to our customers in the major population centers
of the United States, as well as to ensure that we have expertise in each of the
major segments of the healthcare industry. We anticipate that the number of
professional services personnel that we employ, and the number of geographic
office locations that we maintain will continue to grow as we expand our
Professional Services Group.
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Since we actively recruit qualified information technology professionals
from the healthcare industry, our professional services personnel provide a
depth of knowledge and experience specifically focussed to address our
customers' business and technology needs. The following chart describes the
types of professional services we provide.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
PROFESSIONAL CONSULTING SERVICES
- -------------------------------------------------------------------------------------------------
TYPE DESCRIPTION
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Information Technology We help our customers effectively use information
Assessment and Strategy technology by analyzing their business strategies,
Services technical competence, business management processes and
abilities to support existing information technology.
Based upon the results of our analysis, we help our
clients understand their existing level of information
technology capability and provide direction to help them
achieve competitive advantage by managing their
information and data electronically.
- -------------------------------------------------------------------------------------------------
VIO(TM) -- Virtual We provide executive-level information technology
Information Office Services professionals for our customers who either do not employ
their own information technology management or wish to
supplement it. Drawing upon our consultants' considerable
experience and depth of knowledge, we provide information
technology management services with a greater breadth of
expertise than our customers can achieve using their own
management resources. These services include the use of
our CIO Workbench(SM) products, a collection of our
proven information technology management tools and
techniques.
- -------------------------------------------------------------------------------------------------
Integration Consulting We help our customers install and implement software
Services applications and technology products. Based upon years of
project experience, we provide integration consulting
services that include systems planning, analysis,
selection, design, construction, implementation, data
conversion, testing, business process development,
training development and delivery and systems support.
This helps our customers succeed in implementing
difficult systems projects.
- -------------------------------------------------------------------------------------------------
Staffing Services We provide temporary staffing for customers who lack
qualified information technology personnel. By utilizing
both our own professional services personnel and a
national network of contracted, technical specialists, we
provide access to specialized technical personnel on both
short-term and long-term basis. Personnel placement
services are also available through a variety of fee
arrangements.
- -------------------------------------------------------------------------------------------------
E-Commerce Solutions Services We assist our customers in developing, deploying and
maintaining customized e-commerce applications. Services
include systems planning, analysis, design, construction,
implementation, data conversion, testing, business
process development, training development and delivery
and systems support.
- -------------------------------------------------------------------------------------------------
</TABLE>
SALES AND MARKETING
We take a consultative approach to selling our services. Our Professional
Services Group, consisting of approximately 70 members, is trained in a
proprietary assessment methodology that allows them to quickly and
comprehensively analyze our customers' information technology capabilities and
requirements. In conjunction with their consulting responsibilities, our
Professional Services Group identifies opportunities to introduce our customers
to the broad range of applications and technology solutions available to them.
In
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many cases, these will include applications hosted in our Customer Connectivity
Centers as well as HealthWeb and Exchange Manager.
Our five person professional sales force, which is led by a veteran
healthcare sales executive, uses traditional marketing, lead generation and
customer qualification techniques to directly sell our hosted products and
services to prospective and existing customers. This sales force concentrates
specifically on solutions for provider and payer organizations. We plan to
continue to expand our sales force.
Our marketing and business development organization focuses on building our
corporate brands, including our software applications and information technology
services and our healthcare Internet portal. This organization is also
responsible for developing and refining our business strategies. In addition,
our marketing and business development organization is responsible for the
following programs:
- LEAD GENERATION PROGRAM. This program identifies and qualifies
prospective customers through seminars, telemarketing, audio and web
casting, direct mail and annual conferences.
- INDUSTRY MARKETING AND BRAND DEVELOPMENT PROGRAM. This program includes
participation in and sponsorship of industry tradeshows and trade media
advertising.
- STRATEGIC BUSINESS ALLIANCES PROGRAM. This program initiates and
develops strategic partnerships to implement co-branding, cooperative
marketing and distribution relationships.
CUSTOMER SERVICE
We believe that a high level of support is necessary to maintain long-term
relationships with our customers. Our service desk staff provide a wide range of
customer support functions. Our customers may contact the service desk via a
toll-free number 24 hours a day, seven days a week. The account manager assigned
to each of our customers 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.
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 which we can deploy as needed to address customer needs.
We cross-train employees to support multiple application 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 keeps
track of 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. We are
currently implementing Remedy, a third party software application for tracking
the status, and subsequent resolution, of problems that have been reported to
our help desk. This allows us to cost-effectively distribute our knowledge-base
of application problem resolutions to employees and customers. All changes to
computer software are coordinated centrally and new versions of software,
containing updates and enhancements are released on a regular basis with strict
testing and controls. This ensures that the new software functions correctly in
the customer's environment. As of August 31, 1999, we had approximately 150
employees and independent contractors in customer support functions.
VENDOR PARTNER RELATIONSHIPS
We maintain relationships with a large and increasing number of software
vendors in the healthcare information technology market. 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 be able 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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The benefits for our vendor partners include:
- web-enablement of their products;
- professional installation and operation of their products;
- ease of integration with third party products and services;
- easier software version control;
- easier add-on product capability;
- lower implementation risk;
- enhanced distribution channels;
- shorter sales cycle;
- lower maintenance and support costs; and
- potentially higher margins.
The benefits for us include:
- access to market leading products and technology solutions;
- ability to focus on service delivery rather than software development;
- co-marketing with industry leading brands;
- enhanced distribution channels; and
- competitive pricing.
We are committed to delivering cost-predictable proven solutions to our
customers. We evaluate and recommend applications or technologies that most
closely match the business requirements, technical needs and price requirements
of our customers. We are capable of hosting the leading commercially available
healthcare applications on a broad range of operating platforms, and we are able
to deploy these applications as required by our customers. Some of our
healthcare vendor partners include:
- Epic Systems, Inc.;
- Medic Computer Systems, Inc.;
- Medical Manager Corporation; and
- McKesson HBOC, Inc.
COMPETITION
The market for healthcare information 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:
- application services providers, such as USinternetworking, Inc. and
Exodus Communications, Inc.;
- healthcare e-commerce and portal companies, such as Healtheon Corporation
and CareInsite, Inc.;
- information technology outsourcing companies, such as Perot Systems
Corporation, Computer Sciences Corporation and Electronic Data Systems
Corporation;
- information technology consulting firms, such as Superior Consultant
Holdings Corporation, First Consulting Group, Inc. and the consulting
divisions of the major accounting firms; and
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- healthcare information software vendors selling products, such as IDX
Systems Corporation, McKesson HBOC, Inc., and Cerner 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 with whom we have
licensing agreements may compete with us from time to time by selling software
on a stand alone 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 position in the market as
compared to our competitors 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. Developed software includes Enterprise Manager, MCIS, Directory
Studio, Exchange Manager, Access Manager, and the CIO Workbench. Our
Professional 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 on a combination of copyright, trademark and trade
secret laws, confidentiality procedures and contractual provisions to protect
our intellectual property. We have no patented technology. We have registered
federal trademarks or service marks for TriZetto, Directory Studio, MCIS and
Without Integration There is Chaos.
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, obtain a license or cease
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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.
TECHNOLOGY
Customer Connectivity Centers
We operate Customer Connectivity Centers in Englewood, Colorado and
Birmingham, Alabama. Each center operates with state-of-the-art environmental
protection systems to maintain high availability to host systems and wide area
network access. The computer rooms are protected by automated INERGEN fire
suppression systems. The computer rooms are equipped with redundant Leibert high
volume air conditioning systems with capacity for supporting future expansion.
The computer rooms and portions of the adjacent office areas are supplied with
continuous power from battery-based power systems and diesel generator backup
power is installed at both sites and tested weekly. The Customer Connectivity
Centers currently support 50 customers on six unique platforms across 73 CPU
systems using leading operating systems from IBM, Compaq Computer
Corporation/Digital and Microsoft Corporation. The host systems support an
aggregate total of three terabytes of disk storage capacity. Disk mirroring and
redundant components are used and system load balancing is employed to maintain
high service level performance.
Network Technology
Our Local Area Network environment uses Ethernet technologies from Cisco
Systems, Inc. and Nortel Networks Corporation. The backbone is comprised of
multiple 100Mb switches in a fail-over configuration. Each server has a minimum
of 100Mb of dedicated bandwidth, with a primary and secondary path.
Our Wide Area Network environment uses technology from Cisco Systems. All
routers are implemented in a redundant configuration, allowing for nearly
immediate restoration of service in the event of a component failure. We use
Frame Relay, point-to-point T1 and Internet-based Virtual Private Network
connections to our customers. These circuits are tailored to meet the
application and response time needs of each customer.
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.
We use multiple levels of security in order to provide high levels of
application and data integrity. All direct customer connections are filtered so
that they only have visibility to the host systems they use. Access to each
application is gated by the platform it runs on, as well as the application
itself. All Internet-based services use public-key certificates for
authentication and 128-bit encryption.
We have partnered with MCI Worldcom, Inc. to provide high-bandwidth network
connection to both of our Customer Connectivity Centers. This connectivity
infrastructure is scalable in cost effective increments to provide guaranteed
response times. In addition, we have implemented dual access into both data
centers, and in conjunction with MCI Worldcom's self-healing Frame Relay
infrastructure, can provide high levels of network availability and scalability.
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Connectivity Management
We provide active management for all infrastructure components and server
platforms from our Customer Connectivity Center in Englewood, Colorado. Using
state-of-the-art management platforms including Hewlett-Packard Openview, Cisco
CiscoWorks, Nortel Networks Optivity, and the intelligence built into all the
infrastructure components, we are able to provide fault isolation and
resolution, performance monitoring and tuning, trending analysis, realtime and
historical reporting on service level agreements objectives, and auditing of all
events. Monitoring 24 hours per day, seven days a week, is driven by automated
systems that track normal operations, and involve management staff only when an
event happens.
Internet Infrastructure
Each of our Customer Connectivity Centers is connected to the Internet
through T1 Frame Relay circuits provided by UUNET, the Internet services
division of MCI WorldCom, one of the largest Internet backbone providers
globally. These connections are scalable through multiple T3 circuits. We have
designed redundant Wide and Local Area Network equipment in order to optimize
Internet services availability even in the event of a component failure,
utilizing flagship products from Cisco Systems and Nortel Networks.
All access via the Internet into our Customer Connectivity Center network
is protected by a firewall and proxy server configuration. Access is controlled
on a per user basis, with full auditing and reporting. Security is further
enhanced through the use of up to 128-bit encryption across the network, access
control methods including multi-level passwords, implementation of HTTPS and
security policies governed by HIPAA compliance requirements and extensive
logging, monitoring and software alarms. We maintain another network, outside of
our firewalls, that utilizes private frame-relay links to connect our clients
that require a more secure, direct connection to their systems.
We have implemented Microsoft software technology for advanced messaging,
Internet systems development and infrastructure to support critical
collaborative technologies. This includes Microsoft Windows NT, Microsoft
Exchange, Internet Information Server and the Microsoft development suite
including Visual Interdev. We support the Internet standard access methods via
web browsers and POP3 and SMTP messaging protocols.
Our messaging and web server platforms are geographically dispersed
providing high-availability and redundancy in support of mission-critical,
round-the-clock processing. Our platform architecture is designed to ensure high
availability through the use of replicated software services, fault-tolerant
hardware, redundant equipment and backup power systems in a tightly controlled
physical environment.
GOVERNMENT REGULATION
INTERNET REGULATION. There are increasing numbers of laws and regulations
pertaining to the Internet. In addition, 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. Moreover, it may take years to determine
whether and how existing laws such as those governing issues such as
intellectual property ownership and infringement, privacy, libel, copyright,
trademark, trade secret, obscenity, personal privacy, taxation, regulation of
professional services, regulation of medical devices and the regulation of the
sale of other specified goods and services apply to the Internet and Internet
advertising. The requirement that we comply with any new legislation or
regulation, or any unanticipated application or interpretation of existing laws,
may decrease the growth in the use of the Internet, which could in turn decrease
the demand for our service, increase our cost of doing business or otherwise
have a material adverse effect on our business, results of operations and
financial condition.
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INTERNET TAXATION. A number of legislative proposals have been made at the
federal, state and local level, and by foreign governments, that would impose
additional taxes on the sale of goods and services over the Internet and certain
states have taken measures to tax Internet-related activities. 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. Such legislation or other attempts at regulating
commerce over the Internet may substantially impair the growth of commerce on
the Internet and, as a result, adversely affect our opportunity to derive
financial benefit from such activities.
PRIVACY CONCERNS. The confidentiality of patient records and the
circumstances under which records may be released for inclusion in the databases
we host are subject to substantial regulation by state governments. These state
laws and regulations govern both the disclosure and the use of confidential
patient medical record information. Although compliance with these laws and
regulations is at present principally the responsibility of the hospital,
physician or other healthcare provider, regulations governing patient
confidentiality rights are evolving rapidly. Additional legislation governing
the dissemination of medical record information has been proposed at both the
state and federal level. This legislation may require holders of this
information to implement security measures that may require substantial
expenditures by us. For example, the proposed Health Information Modernization
and Security Act would establish standards and requirements for the electronic
transmission of health information. There can be no assurance that changes to
state or federal laws will not materially restrict the ability of healthcare
providers to submit information from patient records using our applications.
FEDERAL AND STATE HEALTHCARE REGULATION. Our software applications,
information technology services and healthcare Internet portal are designed to
function within the current healthcare financing and reimbursement system.
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 change the operating environment for our customers. As in
the past, healthcare organizations may react to these proposals and the
uncertainty surrounding such proposals in ways that could result in a reduction
or deferral in the use of our technologies and services. We cannot predict with
any certainty what impact, if any, such proposals or healthcare reforms might
have on our business, financial condition or results of operations.
We perform billing and claims services which are governed by numerous
federal and state civil and criminal laws. The federal government in recent
years has placed increased scrutiny on billing and collection practices of
healthcare providers and related entities and particularly on potential
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 impact on our business, financial condition or results of operations.
Legislation currently being considered at the federal level could impact
the manner in which we conduct our business. The Health Insurance Portability
and Accountability Act of 1996 mandates the use of standard transactions,
standard identifiers, security and other provisions by the year 2000. We are
revising our networks and software applications to enable compliance with the
proposed regulations. However, until the proposed regulations become final, they
could change, which could require us to expend additional resources to comply
with the revised standards. In addition, the success of our compliance efforts
may be dependent on the success of healthcare participants in dealing with the
standards.
CONSUMER PROTECTION LAWS. In addition, 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
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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 impact on our
business, financial condition or results of operations.
EMPLOYEES
As of August 31, 1999, we had approximately 300 employees. Our employees
are not subject to any collective bargaining agreements, and we generally have
good relations with our employees.
FACILITIES
As of August 31, 1999, we leased ten facilities, all located within the
United States. Our principal executive and corporate offices are located in
Newport Beach, California. Our Customer Connectivity Centers are located in
Englewood, Colorado and Birmingham, Alabama, and our billing service centers are
located in Shelton, Nebraska and Louisville, Kentucky. We also have offices for
our support staff, development and network operations in Englewood, Colorado,
Provo, Utah, Moorestown, New Jersey, Glastonbury, Connecticut and Irving, Texas.
Our leases have expiration dates ranging from 1999 to 2004. We believe that our
facilities are adequate for our current operations and that additional leased
space can be obtained if needed.
LEGAL PROCEEDINGS
There are no legal proceedings pending to which we are a party and our
management is unaware of any contemplated legal actions against us.
51
<PAGE> 54
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors are as follows:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION CLASS
- ---- --- -------- --------
<S> <C> <C> <C>
Jeffrey H. Margolis.................. 36 Chief Executive Officer, President and Chairman III
of the Board
Michael J. Sunderland................ 44 Senior Vice President of Finance, Chief Financial --
Officer and Secretary
D. Brian Karr........................ 33 Vice President of Finance and Treasurer --
Donald J. Lothrop.................... 40 Director III
Peter D. Mann........................ 32 Director II
William E. Fisher.................... 53 Director II
Paul F. LeFort....................... 58 Director I
</TABLE>
JEFFREY H. MARGOLIS co-founded TriZetto 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, 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 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.
D. BRIAN KARR 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. Mr.
Karr served as Director of Finance for Information Services for PacifiCare
Health Systems, Inc., a managed care organization, from February 1997 to July
1997. Mr. Karr served as Director of Finance for Information Systems for FHP
International Corporation, a managed care organization from October 1994 to
February 1997. 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.
52
<PAGE> 55
DONALD J. LOTHROP has been a Director since April 1998. Mr. Lothrop has
been a General Partner of Delphi Management Partners II, L.P. since July 1994, a
General Partner of Delphi Management Partners III, L.L.C. since March 1995 and a
General Partner of Delphi Management Partners IV, L.L.C. since October 1997.
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 area. From
1989 to 1990, he worked at Bain & Company, Inc., a management consulting firm.
Mr. Lothrop received his B.S. degree from Pennsylvania State University in 1981
and his M.B.A. from Harvard Business School in 1989.
PETER D. MANN has been a Director since April 1998. Mr. Mann joined
Fidelity Ventures, the venture capital arm of Fidelity Investments in January
1994. Mr. Mann is currently a Vice President of Fidelity Ventures and he focuses
on investment opportunities in business services. Mr. Mann has been a Vice
President of Fidelity Capital Associates, Inc., the general partner of Fidelity
Venture Limited, since July 1998. Mr. Mann received his B.S. degree in Business
Administration from Bucknell University in 1989 and his M.B.A. degree from
Northeastern University in 1993.
WILLIAM E. FISHER has been a Director since March 1999. Mr. Fisher is
Chairman, President and Chief Executive Officer of Transaction Systems
Architects, Inc. and has served in these capacities since founding that company
in November 1993. Mr. Fisher was employed by Applied Communications, Inc., the
predecessor to Transaction Systems, from March 1987 to November 1993. 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, Hypercom Corporation and West Teleservices, Inc. Mr. Fisher received
his B.S. degree from Indiana State University and his M.B.A. from the University
of Nebraska.
PAUL F. LEFORT has been a Director since April 1999. Since October 1995,
Mr. LeFort has served as the Chief Information Officer for United HealthCare
Corporation, a health and well being company. 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/Economics
from Boston College in 1962.
OTHER KEY EMPLOYEES
Our key employees are as follows:
SHAWN P. BOWEN, 34, joined us in July 1997 as our Vice President, Desktop &
Network Services. Since June 1999, Mr. Bowen has served as Vice President,
Connectivity Services and Chief Technical Officer. Mr. Bowen served as Director
of Desktop Strategy for FHP Healthcare/PacifiCare, a managed care organization
from July 1994 to June 1997. Prior to July 1994, Mr. Bowen 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. Mr. Bowen received his B.S. degree in Business
Administration and Management Information Systems from Colorado State University
in 1987.
DEBRA A. BRIGHTON, 45, joined us in January 1998 as our Vice President of
Applications Development. From May 1997 to December 1997, Ms. Brighton served as
a consultant at Andersen Consulting. From July 1994 to May 1997, Ms. Brighton
served as Associate Vice President, Information Services for PacifiCare, a
managed care organization. Prior to July 1994, Ms. Brighton held various
information technology management positions at TakeCare, Inc., a managed care
organization, United HealthCare Corporation, a health and well being company,
Lincoln National Employee Benefits, an insurance company, and CyCare Systems,
Inc., a practice management software vendor.
DAVID E. CRUTCHFIELD, 40, joined us in May 1999 as our Vice President,
Application Services. From March 1998 to April 1999, Mr. Crutchfield served as
Vice President, Information Systems, of MedPartners, Inc., a physician services
company. From September 1997 to March 1998, Mr. Crutchfield served as Executive
Director of Superior Consultants Co., Inc., a healthcare information technology
53
<PAGE> 56
consulting company. From 1994 to September 1997, Mr. Crutchfield was a Senior
Associate at APM, Inc., a business process reengineering healthcare company. Mr.
Crutchfield received his B.S. degree in Computer Information Science in 1981 and
his Masters in Computer Information Science in 1983, both from Troy State
University.
HARVEY GARTE, 49, joined us in June 1999 as Vice President of Corporate
Development. 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.
LU KABIR, 43, joined us in June 1999 as our Vice President, Marketing and
Business Development. In August 1999, Mr. Kabir was named as our Senior Vice
President, Marketing and Business Development. From July 1997 to January 1999,
Mr. Kabir served as Vice President, Global Business Development for Crossworlds
Software, Inc., an enterprise applications integration software company. From
November 1991 to July 1997, Mr. Kabir served in various executive positions in
marketing and business development for Oracle Corporation's New Media and
Technologies, including Vice President of Worldwide Sales, Services and Business
Development for Oracle-Network Computers, Inc. (now known as Liberate
Technologies, Inc.), a majority-owned subsidiary of Oracle Corporation. Mr.
Kabir earned his Bachelor of Commerce degree from the University of Dhaka,
Bangladesh in 1975 and earned his M.B.A. degree from Sam Houston State
University, Texas in 1977.
KERRY M. KEARNS, 50, joined us in January 1999 as our Senior Vice
President, Core Solutions. From March 1996 to December 1998, Mr. Kearns served
as a Senior Manager at Andersen Consulting. From March 1991 to February 1996,
Mr. Kearns served as Vice President and General Manager of Medaphis Physician
Services Corporation, a physician practice management services company. Mr.
Kearns received his B.S. degree from University of California at Davis in
Biological Sciences and Chemistry in 1971 and earned his M.S. degree in Computer
Science from the University of Nevada at Reno in 1989.
GAIL H. KNOPF, 53, joined us in April 1999 and has served as our Vice
President of e-Commerce since June 1999. 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.
DANIEL J. SPIREK, 33, joined us in May 1997 as our Vice President,
Supplemental Management Services. Since June 1999, Mr. Spirek has served as our
Senior Vice President, Professional Services Group. 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. Mr. Spirek received his B.S. degree in
Information Management Systems from the University of Colorado in 1988.
BOARD COMPOSITION
Our board of directors currently consists of five directors. Our bylaws
provide for a classified board of directors where one class of directors is
elected each year for a term extending to the third succeeding annual meeting of
stockholders after such election. Accordingly, Mr. LeFort shall serve until the
annual meeting of stockholders in 2000, Mr. Fisher and Mr. Mann shall serve
until the annual meeting of stockholders in 2001, and Mr. Margolis and Mr.
Lothrop shall serve until the annual meeting of stockholders in 2002. There are
no family relationships among any of our directors or executive officers.
54
<PAGE> 57
BOARD COMMITTEES
Our board of directors currently has two committees, a compensation
committee and an audit committee. The compensation committee is consists of
Donald J. Lothrop and Peter D. Mann. The compensation committee reviews and
recommends the salaries and bonuses of our officers and certain key employees,
establishes compensation and incentive plans, authorizes and approves the
granting of stock options and restricted stock in accordance with our stock
option and incentive plans and determines other fringe benefits.
The audit committee consists of Paul F. LeFort and William E. Fisher. The
audit committee recommends engagement of our independent public accountants and
is primarily responsible for approving the services performed by our independent
accountants and for reviewing and evaluating our accounting principles and our
system of internal controls.
DIRECTOR COMPENSATION
Directors do not receive any cash fees for their services on the board, but
they are reimbursed for various expenses incurred in connection with attendance
at board meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Our compensation committee consists of Donald J. Lothrop and Peter D. Mann.
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 of directors or compensation committee.
EXECUTIVE COMPENSATION
The following table summarizes all compensation earned by or paid to our
Chief Executive Officer and the two other most highly compensated executive
officers whose total salary and bonus exceeded $100,000 for services rendered in
all capacities to us and our subsidiaries during 1998. We refer to these
officers as our named executive officers in other parts of this prospectus.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION(1) ---------------------
---------------------- SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION(2) SALARY BONUS(3) OPTIONS(#)
- ------------------------------ --------- --------- ---------------------
<S> <C> <C> <C>
Jeffrey H. Margolis
Chief Executive Officer,
President and Chairman of the Board.............. $179,324 $100,000 300,000
Raymond D. Croghan(4).............................. $155,999 -- --
D. Brian Karr
Vice President of Finance and Treasurer.......... $ 88,446 $ 26,000 15,000
</TABLE>
- ---------------
(1) Other than salary and bonus described herein, we did not pay any executive
officer named in the summary compensation table any fringe benefits,
perquisites or other compensation in excess of 10% of such executive
officer's salary and bonus during 1998.
(2) Mr. Sunderland, our Senior Vice President of Finance, Chief Financial
Officer and Secretary, joined us in May 1999. His annual salary is $155,000,
and he is eligible for a bonus at the discretion of our board. Mr.
Sunderland was granted options to purchase 130,000 shares of common stock.
Mr. Sunderland is expected to be a named executive officer in 1999.
(3) These figures represent bonuses earned in 1998 that were paid in 1999.
(4) Mr. Croghan served as Executive Vice President until he resigned from that
position in February 1999.
55
<PAGE> 58
OPTION GRANTS
The following table sets forth information concerning stock options granted
to our named executive officers during the fiscal year ended December 31, 1998:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENTAGE OF AT ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------------
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5% 10%
- ---- ---------- -------------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey H. Margolis........... 200,000 17% $0.275 5/19/03 $2,242,307 $2,843,918
100,000 9% $0.275 11/20/03 $1,121,153 $1,421,959
Raymond D. Croghan............ -- -- -- -- -- --
D. Brian Karr................. 15,000 1% $ 0.25 5/19/08 $ 216,151 $ 346,405
</TABLE>
The figures above represent options granted pursuant to our 1998 Stock
Option Plan. We granted options to purchase 1,158,628 shares of our common stock
in 1998. All options were granted at an exercise price equal to the fair market
value of the common stock on the date of grant as determined by our board of
directors, except for options granted to Mr. Margolis which were granted at 110%
of the fair market value.
The options vest in 25% increments on each of the four annual anniversaries
of the date of grant.
Options granted to the persons listed above expire 10 years from the grant
date, with the exception of options granted to Mr. Margolis which expire 5 years
from the grant date.
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 based upon the initial public offering price of $9 per share 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.
We have never granted stock appreciation rights.
OPTIONS EXERCISED AND FISCAL YEAR-END VALUES
Our named executive officers did not exercise any stock options during the
fiscal year ended December 31, 1998. The following table sets forth the number
and value of the named executive officers' unexercised options at December 31,
1998, based upon a fair market value of $0.25 per share. The value of
unexercised in-the-money options at December 31, 1998 represents an amount equal
to the difference between the initial public offering price of $9 per share and
the option exercise price, multiplied by the number of unexercised in-the-money
options.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1998 AT DECEMBER 31, 1998
------------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C>
Jeffrey H. Margolis..................... 0 300,000 $0 $2,617,500
Raymond D. Croghan...................... -- -- -- --
D. Brian Karr........................... 0 15,000 0 $ 131,250
</TABLE>
56
<PAGE> 59
EMPLOYMENT AGREEMENT
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 of directors. Currently, Mr. Margolis' annual salary is
$216,000. Mr. Margolis is entitled to participate in a bonus plan as recommended
by our compensation committee and approved by the board of directors. 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.
1998 STOCK OPTION PLAN
Our 1998 Stock Option Plan was adopted by our board of directors on May 19,
1998 and approved by a majority of our stockholders on May 19, 1998. Our 1998
Stock Option Plan was amended on January 22, 1999, May 21, 1999 and June 28,
1999. Our 1998 Stock Option Plan provides for awards or sales of shares,
incentive stock options and nonstatutory stock options. A total of 4,000,000
shares of common stock has been reserved for issuance under our 1998 Stock
Option Plan as of June 28, 1999.
Our 1998 Stock Option Plan is administered by our board of directors. Our
board of directors may amend our 1998 Stock Option Plan as desired without
further action by our stockholders except as required by applicable law and to
the extent not causing any material adverse effect on any rights or benefits of
the holders of outstanding options. Our 1998 Stock Option Plan will continue in
effect until terminated by the board or for a term of 10 years from its original
adoption date, whichever is earlier.
The consideration for each award under our 1998 Stock Option Plan will be
established by the board of directors, but in no event will the option price for
incentive stock options be less than the fair market value of a share of common
stock on the date of grant or 110% with respect to optionees who own at least
10% of the outstanding common stock. Nonqualified options will have an option
price of not less than 85% of the fair market value of a share of common stock
on the date of grant. The board of directors has the authority to determine the
time or times at which options granted under the 1998 Stock Option Plan become
exercisable, provided that options expire no later than ten years from the date
of grant or five years with respect to optionees who own at least 10% of the
outstanding common stock. Options are nontransferable, other than upon death or
disability. Our board of directors, however, may permit persons or entities
related to the option holder to exercise options according to such terms as our
board of directors may determine. Incentive stock options may be exercised only
by an employee while employed by us or within 30 days after termination of
employment or within one year for termination resulting from death or
disability.
Unless otherwise determined by our board of directors, the exercisability
of options outstanding under the 1998 Stock Option Plan will accelerate upon a
change in control of our company, which includes but is not limited to the
merger of our company, with or into another corporation where our stockholders
no longer own 50% or more of our stock or the company we merge into, or the sale
of substantially all of our assets, regardless of whether the options are
assumed or new options are issued by the successor corporation.
As of August 31, 1999, we had options outstanding for the purchase of
2,995,668 shares of common stock under our 1998 Stock Option Plan. These options
have exercise prices ranging from $0.25 to $6.50
57
<PAGE> 60
per share and a weighted average per share exercise price of $1.30, and were
held by approximately 300 persons. As of August 31, 1999, none of the options to
purchase shares have been exercised.
EMPLOYEE STOCK PURCHASE PLAN
In July 1999, our board of directors adopted our Employee Stock Purchase
Plan, to be effective upon completion of this offering. A total of 600,000
shares of common stock have been reserved for issuance under our Employee Stock
Purchase Plan. Our Employee Stock Purchase Plan, which is intended to qualify
under Section 423 of the Internal Revenue Code of 1986, as amended, will be
administered by the board of directors or by a committee appointed by the board.
Employees are eligible to participate if they are customarily employed for at
least 20 hours per week and for more than five months in any calendar year.
Employees who own more than 5% of our outstanding stock may not participate. Our
Employee 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.
Our Employee Stock Purchase Plan will be implemented by 12 month offerings
with purchases occurring at six month intervals commencing on the date of this
prospectus.
The purchase price of the common stock under our Employee 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. Employees may end their participation in an offering period at any time
during that period, and participation ends automatically on termination of
employment with us. In the event of a proposed dissolution or liquidation of
TriZetto, the offering periods terminate immediately prior to the consummation
of the proposed action, unless otherwise provided by our board of directors. If
there is a proposed sale of all or substantially all of our assets or the merger
of TriZetto with or into another corporation, then the offering period in
progress will be shortened and a new exercise date will be set that is before
the sale or merger. The offering period in progress shall end on the new
exercise date. Each participant shall be notified at least ten business days
prior to the new exercise date, and unless such participant ends his or her
participation, the option will be exercised automatically on the new exercise
date. Our Employee Stock Purchase Plan will terminate in 2009, unless sooner
terminated by the board of directors.
SECTION 401(k) PLAN
We adopted a 401(k) Plan covering our full-time employees effective as of
January 1, 1998. Our 401(k) Plan is intended to qualify under Section 401(k) of
the Internal Revenue Code of 1986, as amended, so that contributions to the
401(k) Plan by employees or by us, and the investment earnings thereon, are not
taxable to employees until withdrawn from the 401(k) Plan, and so that we can
deduct any contributions that we make, at the time they are made. Pursuant to
the 401(k) Plan, employees may elect to reduce their current compensation by up
to the statutorily prescribed annual limit and to have the amount of such
reduction contributed to the 401(k) Plan. The 401(k) Plan permits us, but does
not require us to make, additional matching contributions to the 401(k) Plan on
behalf of all participants in the 401(k) Plan. We have not made any
contributions to the 401(k) Plan to date and we do not currently have any plans
to make contributions.
58
<PAGE> 61
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth specified information with respect to the
beneficial ownership of our common stock as of August 31, 1999:
- each person (or group of affiliated persons) who is known by us to
beneficially own 5% or more of the common stock;
- each of our directors;
- each of our named executive officers; and
- all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power with
respect to shares. Unless otherwise indicated, the persons named in the table
have sole voting and sole investment control with respect to all shares
beneficially owned. The number and percentage of shares beneficially owned are
based on 15,808,231 shares of common stock outstanding as of August 31, 1999.
The number and percentage of shares beneficially owned also assumes that shares
of common stock subject to options and other rights that are currently
exercisable or exercisable within 60 days of August 31, 1999 are deemed to be
outstanding and beneficially owned. The address for those individuals for which
an address is not otherwise indicated is: c/o The TriZetto Group, Inc., 567 San
Nicolas Drive, Suite 360, Newport Beach, California 92660.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OFFERING OWNED AFTER OFFERING
NAME AND ADDRESS OF ----------------------- NUMBER OF SHARES ---------------------
BENEFICIAL OWNERS NUMBER PERCENT BEING OFFERED NUMBER PERCENT
- ------------------- ----------- -------- ---------------- ---------- -------
<S> <C> <C> <C> <C> <C>
Raymond D. Croghan(1)............ 3,507,681 22% 350,000 3,157,681 16%
370 Interlocken Blvd.
4th Floor
Broomfield, CO 80021
Delphi Ventures IV, L.P.......... 2,736,014 17% 0 2,736,014 14%
Delphi Bio Investments IV, L.P.
3000 Sand Hill Road Building
One, Suite 135 Menlo Park, CA
94025
Fidelity Ventures Limited........ 1,289,336 8% 0 1,289,336 7%
82 Devonshire Street, R25C
Boston, MA 02109-3614
Fidelity Investors Limited
Partnership.................... 1,289,336 8% 0 1,289,336 7%
Fidelity Investors II Limited
Partnership
82 Devonshire Street, R25C
Boston, MA 02109-3614
HLM\UH Fund L.P.................. 961,538 6% 0 961,538 5%
222 Berkeley Street Boston, MA
02116
Jeffrey H. Margolis(2)........... 2,660,000 17% 0 2,660,000 14%
Michael J. Sunderland............ 0 * 0 0 *
D. Brian Karr(3)................. 228,750 1% 0 228,750 1%
Donald J. Lothrop(4)............. 2,736,014 17% 0 2,736,014 14%
Peter D. Mann(5)................. 1,289,336 8% 0 1,289,336 7%
William E. Fisher(6)............. 422,595 3% 0 422,595 2%
Paul F. LeFort................... 60,000 * 0 60,000 *
All executive officers and
directors as a group (7
persons)....................... 7,396,695 47% 0 7,396,695 37%
</TABLE>
- ---------------
* Less than 1%
59
<PAGE> 62
(1) Includes 250,000 shares held by the Raymond D. Croghan Charitable Remainder
Trust, Raymond D. Croghan, Trustee, all of which are intended to be sold in
this offering. 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.
(2) 1,760,000 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. Includes options for 550,000
shares of common stock granted by Mr. Croghan to Mr. Margolis which are
exercisable within 60 days of August 31, 1999. Also includes Mr. Margolis'
options for 50,000 shares of common stock which are exercisable within 60
days of August 31, 1999.
(3) Includes options for 3,750 shares of common stock which are exercisable
within 60 days of August 31, 1999.
(4) 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 interest 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.
(5) Consists of 1,289,336 shares held by Fidelity Ventures Limited. Mr. Mann is
a Vice President of the general partner of Fidelity Ventures and disclaims
beneficial ownership of the 1,289,336 shares. Mr. Mann's business address is
the same as that of Fidelity.
(6) Includes options for 10,000 shares of common stock which are exercisable
within 60 days of August 31, 1999. 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.
(7) Includes options for 10,000 shares of common stock which are exercisable
within 60 days of August 31, 1999.
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CERTAIN TRANSACTIONS
KFS WARRANTS
On September 1, 1997, Croghan & Associates issued a promissory note in the
principal amount of $520,000 to KFS Management, Inc. In connection with this
promissory note, Croghan & Associates issued KFS Management, Inc. warrants to
purchase 243,893 shares of Croghan & Associates common stock at $0.53 per share.
When we acquired Croghan & Associates, we agreed to convert these warrants into
warrants to purchase 162,595 shares of our common stock at $0.80 per share. KFS
exercised its warrants on August 2, 1999. One of our directors, William Fisher,
owns 50% of the issued and outstanding stock of KFS and is an officer and
director of KFS. The value of the warrants, which was not deemed material, was
determined using the Black Scholes valuation model, a fair value option-pricing
model.
CROGHAN & ASSOCIATES AND MARGOLIS HEALTH ENTERPRISES TRANSACTIONS
On October 1, 1997, we entered into an Exchange Agreement with all of the
stockholders of Croghan & Associates and Margolis Health Enterprises. Pursuant
to the Exchange Agreement, we acquired all of the issued and outstanding stock
of Croghan & Associates in exchange for 5,800,895 shares of our common stock,
and we acquired all of the issued and outstanding stock of Margolis Health
Enterprises, Inc., an entity under our common control, in exchange for 3,716,667
shares of our common stock. Mr. Margolis received 2,500,000 shares and Mr.
Croghan received 4,050,000 shares pursuant to the Exchange Agreement.
SERIES A FINANCING
On April 30, 1998 and October 30, 1998, we issued an aggregate of 4,545,454
shares of Series A Preferred Stock for $1.43 per share. In connection with our
Series A offering, each employee stockholder, including those stockholders who
received shares of common stock pursuant to the Exchange Agreement, were
required to enter into a Restricted Stock Agreement. The Restricted Stock
Agreements provide for vesting of shares and transfer restrictions.
SERIES B FINANCING
On April 12, 1999, we issued an aggregate of 1,730,770 shares of Series B
Preferred Stock for $2.60 per share. Of the 1,730,770 shares of preferred stock
sold by us, 769,232 shares were sold to the following principal stockholders for
an aggregate purchase price of $2,000,003.
<TABLE>
<CAPTION>
NUMBER AGGREGATE
PURCHASER OF SHARES PURCHASE PRICE
- --------- --------- --------------
<S> <C> <C>
Delphi Ventures IV, L.P. ................................... 282,635 $734,851
Delphi BioInvestments IV, L.P. ............................. 5,827 $ 15,150
Fidelity Ventures Limited................................... 240,385 $625,001
Fidelity Investors II Limited Partnership................... 240,385 $625,001
</TABLE>
In connection with the sale of these shares, the Delphi entities agreed to
vote their shares to elect a designee of the Fidelity entities to our board of
directors and the Fidelity entities agreed to vote their shares to elect a
designee of the Delphi entities. Donald Lothrop currently serves as the Delphi
entities' designee and Peter Mann currently serves as the Fidelity entities'
designee.
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 April 30, 1999
and shall forgive an additional $25,000 and the related interest on each of the
next three anniversaries of Mr. Margolis' employment agreement, so long as Mr.
Margolis remains our employee. The
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<PAGE> 64
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.
MARGOLIS $200,000 NOTE
In June 1998, we loaned Mr. Margolis $200,000 in exchange for a promissory
note in the principal sum of $200,000, bearing an interest rate of 8% per year.
The entire sum of principal and interest of the note was due on June 15, 1999.
The note was secured by 200,000 shares of our common stock. On May 21, 1999, we
repurchased 200,000 shares of common stock owned by Mr. Margolis in exchange for
the note.
CROGHAN $500,000 NOTE
In October 1998, we loaned Mr. Croghan $500,000 in exchange for a
promissory note in the principal sum of $500,000, bearing an interest rate of 8%
per year. The entire sum of principal and interest of the note was due on
October 26, 1999. The note was secured by 362,319 shares of our common stock. On
June 30, 1999, we repurchased 362,319 shares of common stock by Mr. Croghan in
exchange for the note.
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our authorized capital stock, after
giving effect to the conversion of all outstanding preferred stock into common
stock, will consist of 40,000,000 shares of common stock, $0.001 par value, and
5,000,000 shares of preferred stock, $0.001 par value.
The following is a summary of certain provisions of our common stock,
preferred stock, amended and restated certificate of incorporation and bylaws.
COMMON STOCK
As of August 31, 1999, there were 9,532,007 shares of common stock
outstanding, held by approximately 91 stockholders of record. An additional
6,276,224 shares of our common stock will be issued upon conversion of preferred
stock on the closing of this offering. All outstanding shares of common stock
are, and the common stock to be issued in this offering will be, fully paid and
nonassessable.
The following summarizes the rights of holders of our common stock:
- each holder of shares of common stock is entitled to one vote per share
on all matters to be voted on by stockholders generally, including the
election of directors;
- there are no cumulative voting rights;
- the holders of our common stock are entitled to dividends and other
distributions as may be declared from time to time by the board of
directors out of funds legally available for that purpose, if any;
- upon our liquidation, dissolution or winding up, the holders of shares
of common stock will be entitled to share ratably in the distribution of
all of our assets remaining available for distribution after
satisfaction of all our liabilities and the payment of the liquidation
preference of any outstanding preferred stock; and
- the holders of common stock have no preemptive or other subscription
rights to purchase shares of our stock, nor are they entitled to the
benefits of any redemption or sinking fund provisions.
PREFERRED STOCK
Upon the closing of this offering, there will be no shares of preferred
stock outstanding. Our certificate of incorporation authorizes our board of
directors to create and issue one or more series of preferred stock and
determine the rights and preferences of each series within the limits set forth
in our
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<PAGE> 65
certificate of incorporation and applicable law. Among other rights, the board
of directors may determine, without further vote or action by our stockholders:
- the number of shares constituting the series and the distinctive
designation of the series;
- the dividend rate on the shares of the series, whether dividends will be
cumulative, and if so, from which date or dates, and the relative rights
of priority, if any, of payment of dividends on shares of the series;
- whether the series will have voting rights in addition to the voting
rights provided by law and, if so, the terms of the voting rights;
- whether the series will have conversion privileges and, if so, the terms
and conditions of conversion;
- whether or not the shares of the series will be redeemable or
exchangeable, and, if so, the dates, terms and conditions of redemption
or exchange, as the case may be;
- whether the series will have a sinking fund for the redemption or
purchase of shares of that series, and, if so, the terms and amount of
the sinking fund; and
- the rights of the shares of the series in the event of our voluntary or
involuntary liquidation, dissolution or winding up and the relative
rights or priority, if any, of payment of shares of the series.
Unless otherwise provided by our board of directors, the shares of all
series of preferred stock will rank on a parity with respect to the payment of
dividends and to the distribution of assets upon liquidation. Although we have
no present plans to issue any shares of preferred stock, any future issuance of
shares of preferred stock, or the issuance of rights to purchase preferred
shares, may have the effect of delaying, deferring or preventing a change of
control in our company or an unsolicited acquisition proposal. The issuance of
preferred stock also could decrease the amount of earnings and assets available
for distribution to the holders of common stock or could adversely affect the
rights and powers, including voting rights, of the holders of the common stock.
REGISTRATION RIGHTS
The holders of the 6,276,224 outstanding shares of our common stock which
will be issued upon conversion of preferred stock on the closing of this
offering, which are referred to below as our "preferred investors," and the
holders of 5,567,681 shares of our common stock, which are referred to below as
the "founders," have the right to cause us to register their shares under the
Securities Act of 1933 as follows:
- DEMAND REGISTRATION RIGHTS: Our preferred investors may make a demand
for registration six months after this offering by providing a written
demand from the holders of at least 35% of the shares of common stock
issued upon conversion of the preferred stock. We will use our best
efforts to effect such registration as soon as possible after receipt of
notice.
- PIGGYBACK REGISTRATION RIGHTS: Our preferred investors and the founders
can request to have their shares registered anytime we file a
registration statement to register any of our securities for our own
account. Such registration opportunities are unlimited but the number of
shares that can be registered may be eliminated entirely or cut back in
certain situations by the underwriters. Our preferred investors have
waived their piggyback rights in this offering.
- REGISTRATION RIGHTS: After we have qualified for registration on Form
S-3, our preferred investors can request us to register their shares if
the aggregate price of the shares to the public is not less than
$500,000. We are not obligated to register their shares on Form S-3 more
than once during any six month period.
The registration rights will terminate five years following the closing of
this offering.
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ANTI-TAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW AND OUR CERTIFICATE OF
INCORPORATION AND BYLAWS
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Subject to certain exceptions, Section 203 prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
interested stockholder attained such status with the approval of the board of
directors or the business combination is approved in a prescribed manner. A
"business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
certain exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, fifteen percent
or more of a corporation's voting stock. This statute could prohibit or delay
the accomplishment of mergers or other takeover or change in control attempts
relating to our company and, accordingly, may discourage attempts to acquire us.
In addition, some provisions of our certificate of incorporation and bylaws
may be deemed to have an anti-takeover effect and may delay, defer or prevent a
tender offer or takeover attempt that a stockholder might consider in its best
interest, including those attempts that might result in a premium over the
market price for the shares held by our stockholders. These provisions include:
- BOARD OF DIRECTORS. Our board of directors is divided into three classes
of directors serving staggered terms. Our certificate of incorporation
authorizes our board of directors to fill vacant directorships or
increase the size of the board of directors. Accordingly, even if a
stockholder succeeds in a proxy contest, he would likely only be able to
elect a minority of our board of directors at any one annual meeting.
- STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS. Our certificate of
incorporation provides that stockholders may not take action by written
consent, but only at a duly called annual or special meeting of
stockholders. Our certificate of incorporation further provides that
special meetings of our stockholders may be called only by the chairman
of the board of directors, by a committee of the board of directors or a
majority of the board of directors, and in no event may the stockholders
call a special meeting. Thus, without approval by the board of directors
or chairman, stockholders may take no action between annual meetings.
- ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. The bylaws provide that stockholders seeking to bring
business before an annual meeting of stockholders, or to nominate
candidates for election as directors at an annual meeting of
stockholders, must provide timely notice of this intention in writing. To
be timely, a stockholder's notice must be delivered to or mailed and
received at our principal executive offices not less than 120 days prior
to the first anniversary of the date of our notice of annual meeting
provided with respect to the previous year's annual meeting of
stockholders. However, if no annual meeting of stockholders was held in
the previous year or the date of the annual meeting of stockholders has
been changed to be more than 30 calendar days from the time contemplated
at the time of the previous year's proxy statement, then a proposal shall
be received no later than the close of business on the tenth day
following the date on which notice of the date of the meeting was mailed
or a public announcement was made, whichever first occurs. The bylaws
also include a similar requirement for making nominations at special
meetings and specify requirements as to the form and content of a
stockholder's notice. These provisions may preclude stockholders from
bringing matters before an annual meeting of stockholders or from making
nominations for directors at an annual or special meeting of
stockholders.
- AUTHORIZED BUT UNISSUED SHARES. The authorized but unissued shares of
common stock and preferred stock are available for future issuance
without stockholder approval, subject to certain limitations imposed by
the Nasdaq National Market. These additional shares may be utilized for a
variety of corporate purposes, including future public offerings to raise
additional capital, corporate acquisitions and employee benefit plans.
The existence of authorized but unissued and unreserved
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<PAGE> 67
common stock and preferred stock could render more difficult or
discourage an attempt to obtain control of our company by means of a
proxy contest, tender offer, merger or otherwise.
Delaware law provides generally that the affirmative vote of a majority of
the shares entitled to vote on any matter is required to amend a corporation's
certificate of incorporation or bylaws, unless a corporation's certificate of
incorporation or bylaws, as the case may be, requires a greater percentage. We
have provisions in our certificate of incorporation and bylaws which require a
vote of 66 2/3% of the holders of the outstanding voting stock, voting together
as a single class to amend, revise or repeal anti-takeover provisions.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation provides that, except to the extent
permitted by Delaware law, our directors shall not be personally liable to us or
our stockholders for monetary damages for any breach of fiduciary duty as a
director. Under Delaware law, the directors have a fiduciary duty to us that is
not eliminated by this provision of our certificate and, in appropriate
circumstances, equitable remedies such as injunctive or other forms of
nonmonetary relief will remain available. In addition, each director will
continue to be subject to liability under Delaware law for breach of the
director's duty of loyalty to us for acts or omissions which are found by a
court of competent jurisdiction to be not in good faith or that involve
intentional misconduct, or knowing violations of law, for actions leading to
improper personal benefit to the director, and for payment of dividends or
approval of stock repurchases or redemptions that are prohibited by Delaware
law. This provision also does not affect the director's responsibilities under
any other laws, such as the federal securities laws.
Section 145 of the Delaware corporate law empowers a corporation to
indemnify its directors and officers and to purchase insurance with respect to
liability arising out of their capacity or status as directors and officers,
provided that this provision shall not eliminate or limit the liability of a
director:
- for any breach of the director's duty of loyalty to the corporation or
its stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- arising under Section 174 of the Delaware corporate law; or
- for any transaction from which the director derived an improper personal
benefit.
Delaware law provides further that the indemnification permitted by that
law shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under a corporation's bylaws, any agreement, a vote of
stockholders or otherwise. Our certificate of incorporation eliminates the
personal liability of directors to the fullest extent permitted by Section
102(b)(7) of the Delaware corporate law and provides that we may fully indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (whether civil,
criminal, administrative or investigative) by reason of the fact that such
person is or was our employee, director or officer or is or was serving at our
request as an employee, director or officer of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding.
We have entered into agreements to indemnify our directors and officers, in
addition to the indemnification provided for in the bylaws. We believe that
these provisions and agreements are necessary to attract and retain qualified
directors and officers. Our bylaws also permit us to secure insurance on behalf
of any officer, director, employee or other agent for any liability arising out
of his or her actions, regardless of whether Delaware law would permit
indemnification.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is U.S. Stock
Transfer Corporation.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering there has been no public market for our common
stock. No predictions can be made regarding the effect, if any, that market
sales of shares or the availability of shares for sale will have on the market
price prevailing from time to time. As described below, only a limited number of
shares will be available for sale shortly after this offering due to certain
contractual and legal restrictions on resale. Nevertheless, sales of substantial
amounts of our common stock in the public market after the restrictions lapse
could adversely affect the prevailing market price.
Upon completion of this offering, we will have 19,658,231 shares of common
stock outstanding based on 15,808,231 shares outstanding at August 31, 1999. The
4,200,000 shares of common stock being sold hereby will be freely tradable,
other than by our "affiliates" as such term is defined in the Securities Act,
without restriction or registration under the Securities Act. The 15,458,231
remaining shares were issued and sold by us in private transactions are
restricted shares and are eligible for public sale if registered under the
Securities Act or sold in accordance with Rule 701 under the Securities Act.
All restricted shares held by our executive officers, directors, affiliates
and employees are subject to lock-up agreements with the underwriters under
which the holders of the restricted shares have agreed they will not sell any
common stock owned by them, other than the shares sold by Raymond D. Croghan and
his charitable remainder trust identified in this prospectus, without the prior
written consent of the representatives of the underwriters for a period of 180
days from the effective date of the Registration Statement of which this
prospectus is a part.
The following table indicates approximately when the shares of our common
stock that are not being sold in the offering, but which will be outstanding
after the offering is completed, will be eligible for sale into the public
market.
<TABLE>
<CAPTION>
TIME NUMBER OF SHARES
- ---- ----------------
<S> <C>
Effective Date..................................... 413,836
90 days after Effective Date....................... 0
180 days after Effective Date...................... 12,256,030
</TABLE>
The remaining 2,788,365 shares of our common stock will be eligible for
sale into the public market at various times after the expiration of one-year
holding periods. Most of the restricted shares that will be available for public
resale after 180 days after the effective date will be subject to volume and
other resale restrictions pursuant to Rule 144 because the holders are
affiliates of TriZetto.
Subject to limitations on the aggregate offering price of a transaction and
other conditions, Rule 701 may be relied upon with respect to the resale of
securities originally purchased from us by our employees, directors, officers,
consultants or advisers prior to the closing of this offering, pursuant to
written compensatory benefit plans or written contracts relating to the
compensation of such persons. In addition, the Securities and Exchange
Commission has indicated that Rule 701 will apply to stock options granted by us
before this offering, along with the shares acquired upon exercise of these
options. Securities issued in reliance on Rule 701 are deemed to be restricted
shares and, beginning 90 days after the date of this prospectus, unless subject
to the contractual restrictions described above, may be sold by persons other
than affiliates subject only to the manner of sale provisions of Rule 144 and by
affiliates under Rule 144 without compliance with its one-year minimum holding
period requirements.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person deemed to be our affiliate, or a person
holding restricted shares who beneficially owns shares that were not acquired
from us or our affiliate within the previous year, would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of:
- 1% of the then outstanding shares of common stock, or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the date on which notice of the sale is filed
with the Securities and Exchange Commission.
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Sales under Rule 144 are subject to requirements relating to manner of
sale, notice and availability of current public information about us. However,
if a person (or persons whose shares are aggregated) is not deemed to have been
our affiliate at any time during the 90 days immediately preceding the sale, he
or she may sell his or her restricted shares under Rule 144(k) without regard to
the limitations described above if at least two years have elapsed since the
later of the date the shares were acquired from us or from our affiliate. The
foregoing is a summary of Rule 144 and is not intended to be a complete
description of it.
We intend to file a registration statement under the Securities Act
covering approximately 4,000,000 shares of common stock reserved for issuance
under our 1998 Stock Option Plan and 600,000 shares of common stock reserved for
issuance under our 1999 Employee Stock Purchase Plan. This registration
statement is expected to be filed soon after the date of this prospectus and
will automatically become effective upon filing. Shares registered under this
registration statement will be available for sale in the open market, unless the
shares are subject to vesting restrictions with us or the contractual
restrictions described above.
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UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
among the underwriters and TriZetto, each of the underwriters named below,
through their representatives Bear, Stearns & Co. Inc., Donaldson, Lufkin &
Jenrette Securities Corporation, Adams, Harkness & Hill, Inc. and Wit Capital
Corporation, has severally agreed to purchase from us and the selling
stockholder the aggregate number of shares of common stock set forth opposite
its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ---------
<S> <C>
Bear, Stearns & Co. Inc..................................... 1,627,000
Donaldson, Lufkin & Jenrette Securities Corporation......... 1,284,000
Adams, Harkness & Hill, Inc. ............................... 343,000
Wit Capital Corporation..................................... 171,000
BancBoston Robertson Stephens Inc. ......................... 62,000
Credit Suisse First Boston Corporation...................... 62,000
Deutsche Bank Securities Inc. .............................. 62,000
Hambrecht & Quist LLC....................................... 62,000
Morgan Stanley & Co. Incorporated........................... 62,000
SG Cowen Securities Corporation............................. 62,000
Warburg Dillon Read LLC..................................... 62,000
Advest, Inc. ............................................... 31,000
Brean Murray & Co., Inc. ................................... 31,000
Cantor, Weiss & Friedner, Inc. ............................. 31,000
Dain Rauscher Wessels....................................... 31,000
L.H. Friend, Weinress, Frankson & Presson, Inc. ............ 31,000
Jefferies & Company......................................... 31,000
Leerink Swann & Company..................................... 31,000
Needham & Company, Inc. .................................... 31,000
Northeast Securities, Inc. ................................. 31,000
Stanford Group Company...................................... 31,000
Tucker Anthony Incorporated................................. 31,000
---------
Total.................................................. 4,200,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters are subject to approval of certain legal matters by counsel and to
various other conditions. The nature of the underwriters' obligations is such
that they are committed to purchase and pay for all of the above shares of
common stock if any are purchased.
The underwriters propose to offer the shares of common stock directly to
the public at the public offering price set forth on the cover page of this
prospectus and at such price less a concession not in excess of $0.38 per share
of common stock to other dealers who are members of the National Association of
Securities Dealers, Inc. The underwriters may allow, and such dealers may
reallow, concessions not in excess of $0.10 per share of common stock to certain
other dealers. After this offering, the offering price, concessions and other
selling terms may be changed by the underwriters. The common stock is offered
subject to receipt and acceptance by the underwriters and to certain other
conditions, including the right to reject orders in whole or in part.
We have granted a 30-day over-allotment option to the underwriters to
purchase up to an aggregate of 630,000 additional shares of our common stock
exercisable at the "public offering price" less the "underwriting discounts and
commissions," each as set forth on the cover page of this prospectus. If the
underwriters exercise such option in whole or in part, then each of the
underwriters will be severally committed, subject to certain conditions,
including the approval of certain matters by counsel, to purchase the additional
shares of common stock in proportion to their respective purchase commitments as
indicated in the preceding table.
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The following table summarizes the compensation to be paid to the
underwriters by us and Raymond D. Croghan and his charitable remainder trust in
connection with this offering:
<TABLE>
<CAPTION>
TOTAL
-----------------------------------------
WITHOUT EXERCISE WITH EXERCISE OF
OF THE OVER- THE OVER-ALLOTMENT
PER SHARE ALLOTMENT OPTION OPTION
--------- ------------------- ------------------
<S> <C> <C> <C>
Underwriting discounts.................. $0.63 $2,646,000 $3,042,900
</TABLE>
At the request of TriZetto, the underwriters will reserve up to $2 million
of common stock at the initial public offering price for sale to Employers
Health Insurance Company (a wholly-owned subsidiary of Humana Inc.) and up to $3
million for other potential strategic partners. The aggregate amount would
represent 555,556 shares of common stock at the initial public offering price of
$9.00 per share. We cannot assure you that any of these reserved shares will be
purchased. Employers Health Insurance Company will agree that, if it purchases
any shares of common stock or other securities of TriZetto, it will not sell or
otherwise dispose of such shares or securities until six months after this
offering. Any other strategic partners will also be required to agree to a
similar lock-up.
The price of shares reserved for Employers Health Insurance Company and any
other strategic partners will be the initial public offering price on the cover
page of this prospectus. The number of shares available to the general public
will be reduced to the extent these entities purchase the reserved shares. Any
reserved shares not purchased by them at the closing of the public offering will
be offered by the underwriters to the general public on the same terms as the
other shares offered by this prospectus.
The underwriters, at the request of TriZetto, have also reserved for sale
at the initial public offering price up to 200,000 shares of common stock to be
sold in this offering for sale to our employees and other persons or entities
with whom we have a business relationship, and to their associates and related
persons. The number of shares available for sale to the general public will be
reduced to the extent that any reserved shares are purchased. Any reserved
shares not so purchased will be offered by the underwriters on the same basis as
the other shares offered hereby.
The underwriters do not expect to confirm sales of common stock to any
accounts over which they exercise discretionary authority.
The underwriting agreement provides that we and Raymond D. Croghan and his
charitable remainder trust will indemnify the underwriters against liabilities
specified in the underwriting agreement under the Securities Act of 1933, as
amended, or will contribute to payments that the underwriters may be required to
make in respect thereof.
Our directors, officers, affiliates and employees who hold an aggregate of
approximately 14,963,728 shares of common stock have agreed that they will not
offer, sell or agree to sell, directly or indirectly, or otherwise dispose of
any shares of common stock in the public market, other than the shares being
sold by Raymond D. Croghan and his charitable remainder trust, without the prior
written consent of Bear, Stearns & Co. Inc. for a period of 180 days from the
date of this prospectus.
In addition, we have agreed that for a period of 180 days after the date of
this prospectus we will not, without the prior written consent of Bear, Stearns
& Co. Inc., offer, sell or otherwise dispose of any shares of common stock
except for the shares of common stock offered hereby and the shares of common
stock issuable upon exercise of outstanding options and warrants.
A prospectus in electronic format is being made available on an Internet
website maintained by Wit Capital. In addition, all dealers purchasing shares
from Wit Capital in the offering have agreed to make a prospectus in electronic
format available on websites maintained by each of these dealers. We have
agreed, upon request by a person who received our prospectus in electronic
format, to deliver a prospectus in paper form to such person. Purchases of
shares from Wit Capital are to be made through an account at Wit Capital in
accordance with Wit Capital's procedures for opening an account and transacting
in securities.
Wit Capital, a member of the National Association of Securities Dealers,
Inc., will participate in the offering as one of the managing underwriters. The
National Association of Securities Dealers, Inc.
69
<PAGE> 72
approved the membership of Wit Capital on September 4, 1997. Since that time,
Wit Capital has acted as an underwriter, e-manager or selected dealer in over
125 public offerings. Except for its participation as a manager in the offering,
Wit Capital has no relationship with us or any of our affiliates.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial offering price for the common stock will be
determined by negotiations between us and the underwriters. Among the factors to
be considered in such negotiations will be our results of operations in recent
periods, estimates of our prospects and the industry in which we compete, an
assessment of our management, the general state of the securities markets at the
time of this offering and the prices of similar securities of generally
comparable companies. We have applied for quotation of our common stock on the
Nasdaq National Market, under the symbol "TZIX." There can be no assurance,
however, that an active or orderly trading market will develop for the common
stock or that the common stock will trade in the public markets subsequent to
this offering at or above the initial offering price.
In order to facilitate this offering, certain persons participating in this
offering may engage in transactions that stabilize, maintain or otherwise affect
the price of the common stock during and after this offering. Specifically, the
underwriters may over-allot or otherwise create a short position in the common
stock for their own account by selling more shares of common stock than we and
Raymond D. Croghan and his charitable remainder trust have sold to them. The
underwriters may elect to cover any such short position by purchasing shares of
common stock in the open market or by exercising the over-allotment option
granted to the underwriters. In addition, the underwriters may stabilize or
maintain the price of the common stock by bidding for or purchasing shares of
common stock in the open market and may impose penalty bids, under which selling
concessions allowed to syndicate members or other broker-dealers participating
in this offering are reclaimed if shares of common stock previously distributed
in this offering are repurchased in connection with stabilization transactions
or otherwise. The effect of these transactions may be to stabilize or maintain
the market price at a level above that which might otherwise prevail in the open
market. The imposition of a penalty bid may also affect the price of the common
stock to the extent that it discourages resales thereof. No representation is
made as to the magnitude or effect of any such stabilization or other
transactions. Such transactions may be effected on the Nasdaq National Market or
otherwise and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered hereby
will be passed upon for TriZetto by Stradling Yocca Carlson & Rauth, a
Professional Corporation, Newport Beach, California. Certain legal matters in
connection with this offering will be passed upon for the representatives of the
underwriters by Gibson, Dunn & Crutcher LLP, Los Angeles, California.
EXPERTS
The consolidated financial statements of The TriZetto Group, Inc. as of
December 31, 1997 and 1998 and June 30, 1999 and for the period from May 27,
1997 (date of inception) to December 31, 1997, for the year ended December 31,
1998 and for the six months ended June 30, 1999 included in this prospectus have
been included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The financial statements of Croghan & Associates, Inc. for the year ended
December 31, 1996 and for the nine months ended September 30, 1997 included in
this prospectus have been included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The consolidated financial statements of Creative Business Solutions, Inc.
as of December 31, 1997 and 1998 and for each of the two years in the period
ended December 31, 1998 included in this prospectus have been included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
70
<PAGE> 73
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 with
respect to the common stock offered hereby. This prospectus, which constitutes a
part of the registration statement, does not contain all of the information set
forth in the registration statement or the exhibits and schedules which are part
of the registration statement. For further information with respect to TriZetto
and the common stock, reference is made to the registration statement and the
exhibits and schedules thereto. You may read and copy any document we file at
the SEC's public reference room in Washington, DC. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room. Our SEC
filings are also available to the public from the SEC's website at
http://www.sec.gov.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act and, in
accordance therewith, will file periodic reports, proxy statements and other
information with the SEC. Such periodic reports, proxy statements and other
information will be available for inspection and copying at the SEC's public
reference rooms, our website and the website of the SEC referred to above.
Information on our website does not constitute a part of this prospectus.
71
<PAGE> 74
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
CROGHAN & ASSOCIATES, INC.
Report of Independent Accountants........................... F-24
Statement of Operations..................................... F-25
Statements of Stockholders' Equity.......................... F-26
Statements of Cash Flows.................................... F-27
Notes to Financial Statements............................... F-28
CREATIVE BUSINESS SOLUTIONS, INC. AND SUBSIDIARY
Report of Independent Accountants........................... F-31
Consolidated Balance Sheets................................. F-32
Consolidated Statements of Operations....................... F-33
Consolidated Statements of Stockholders' Equity............. F-34
Consolidated Statements of Cash Flows....................... F-35
Notes to Consolidated Financial Statements.................. F-36
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
Unaudited Pro Forma Combined Condensed Consolidated
Statements of Operations.................................. F-41
Notes to Unaudited Pro Forma Combined Condensed Consolidated
Statements of Operations.................................. F-44
</TABLE>
F-1
<PAGE> 75
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of The TriZetto Group, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related statements of operations, of stockholders' equity (deficit) and of cash
flows present fairly, in all material respects, the financial position of The
TriZetto Group, Inc. and its subsidiaries at December 31, 1997 and 1998 and June
30, 1999 and the results of their operations and their cash flows for the period
from May 27, 1997 (date of inception) to December 31, 1997, for the year ended
December 31, 1998 and for the six months ended June 30, 1999 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards 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 the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
September 7, 1999
F-2
<PAGE> 76
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- PRO FORMA
1997 1998 JUNE 30, 1999 JUNE 30, 1999
------ ------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents................................. $ 773 $ 3,681 $ 4,033
Accounts receivable, less allowance for doubtful accounts
of $154, $204 and $339.................................. 1,159 3,083 5,103
Note receivable from related party........................ -- 25 25
Prepaid expenses and other current assets................. 119 194 115
Income tax receivable..................................... -- 406 --
Deferred taxes............................................ 105 191 885
------ ------- -------
Total current assets.................................... 2,156 7,580 10,161
Property and equipment, net................................. 454 989 5,254
Other assets................................................ 24 40 103
Note receivable from related party.......................... -- 75 50
Goodwill and other intangible assets, net................... -- 36 4,831
------ ------- -------
Total assets............................................ $2,634 $ 8,720 $20,399
====== ======= =======
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Short-term note payable................................... $ -- $ 52 $ 1,189
Note payable to related party............................. 28 -- --
Capital lease obligations, current........................ 28 465
Accounts payable.......................................... 63 95 1,194
Accrued liabilities....................................... 702 1,815 3,793
Income taxes payable...................................... 136 -- 296
Deferred revenue.......................................... 248 -- --
------ ------- -------
Total current liabilities............................... 1,177 1,990 6,937
Long-term notes payable..................................... -- -- 556
Note payable to related party............................... 520 520 520
Capital lease obligations................................... -- 125 1,006
Deferred taxes.............................................. 374 377 362
------ ------- -------
Total liabilities....................................... 2,071 3,012 9,381
------ ------- -------
Commitments (Note 6)
Mandatorily redeemable convertible preferred stock: $0.001
par value;
Shares authorized: 10,392
Series A: Shares issued and outstanding: none in 1997 and
4,545 in 1998 and 1999 and none proforma (unaudited).... -- 6,449 6,449 $ --
------ ------- ------- -------
(Liquidation value: $6,500)
Series B: Shares issued and outstanding: none in 1997 and
1998, 1,731 in 1999 and none proforma (unaudited)....... -- -- 4,483 --
------ ------- ------- -------
(Liquidation value: $4,500)
Stockholders' equity (deficit):
Common stock: $0.001 par value;
Shares authorized: 30,000
Shares issued and outstanding: 9,693 in 1997,
9,217 in 1998 and 9,369 in 1999; and 15,646 pro forma
(unaudited)............................................. 10 9 9 16
Additional paid-in capital.................................. 463 940 8,092 19,017
Notes receivable from stockholders.......................... (13) (741) (41) (41)
Deferred stock compensation................................. -- (460) (6,062) (6,062)
Retained earnings (accumulated deficit)..................... 103 (489) (1,912) (1,912)
------ ------- ------- -------
Total stockholders' equity (deficit).................... 563 (741) 86 $11,018
------ ------- ------- =======
Total liabilities, mandatorily redeemable
convertible preferred stock and stockholders' equity
(deficit)........................................... $2,634 $ 8,720 $20,399
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 77
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM MAY 27, 1997 SIX MONTHS ENDED
(DATE OF INCEPTION) FOR THE YEAR ENDED JUNE 30,
TO DECEMBER 31, DECEMBER 31, ----------------------
1997 1998 1998 1999
------------------- ------------------ ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Recurring revenue.................... $1,191 $ 5,300 $ 2,590 $ 6,201
Consulting revenue................... 1,328 6,131 2,463 6,508
------ ------- ------- -------
Total revenues......................... 2,519 11,431 5,053 12,709
------ ------- ------- -------
Cost of revenues:
Recurring revenue.................... 1,250 3,967 1,662 5,038
Consulting revenue................... 422 3,490 1,584 4,109
------ ------- ------- -------
Total cost of revenues................. 1,672 7,457 3,246 9,147
------ ------- ------- -------
Gross profit........................... 847 3,974 1,807 3,562
------ ------- ------- -------
Operating expenses:
Research and development............. -- 1,083 592 440
Selling, general and
administrative.................... 672 2,885 1,173 3,098
Amortization of deferred stock
compensation...................... -- 22 -- 215
Write-off of acquired in-process
technology........................ -- -- -- 484
------ ------- ------- -------
Total operating expenses.......... 672 3,990 1,765 4,237
------ ------- ------- -------
Income (loss) from operations.......... 175 (16) 42 (675)
Interest income........................ 15 210 60 76
Interest expense....................... (13) (52) (25) (100)
------ ------- ------- -------
Income (loss) before provision for
income taxes...................... 177 142 77 (699)
Provision for income taxes............. 74 82 45 28
------ ------- ------- -------
Net income (loss).................... $ 103 $ 60 $ 32 $ (727)
====== ======= ======= =======
Net income (loss) per share:
Basic................................ $ 0.05 $ 0.01 $ 0.01 $ (0.12)
====== ======= ======= =======
Diluted.............................. $ 0.03 $ 0.00 $ 0.00 $ (0.12)
====== ======= ======= =======
Shares used in computing net income
(loss) per share:
Basic................................ 2,065 4,937 5,066 6,216
====== ======= ======= =======
Diluted.............................. 4,074 12,783 11,380 6,216
====== ======= ======= =======
Pro forma net income (loss) per share:
Basic................................ $ 0.01 $ (0.06)
======= =======
Diluted.............................. $ 0.00 $ (0.06)
======= =======
Shares used in computing pro forma net
income (loss) per share:
Basic................................ 11,213 12,492
======= =======
Diluted.............................. 16,171 12,492
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 78
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM MAY 27, 1997 (DATE OF INCEPTION) TO JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES RETAINED TOTAL
COMMON STOCK ADDITIONAL RECEIVABLE DEFERRED EARNINGS STOCKHOLDERS'
--------------- PAID-IN FROM STOCK (ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL STOCKHOLDERS COMPENSATION DEFICIT) (DEFICIT)
------ ------ ---------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock ............. 2,500 $ 3 $ 13 $ -- $ -- $ -- $ 16
Issuance of common stock for services
rendered ........................... 1,217 1 7 -- -- -- 8
Issuance of common stock for purchase
of Croghan & Associates, Inc. ...... 5,801 6 430 -- -- -- 436
Issuance of common stock for note
receivable.......................... 175 -- 13 (13) -- -- --
Net income............................ -- -- -- -- -- 103 103
------ --- ------ ----- ------- ------- -------
Balance, December 31, 1997............ 9,693 10 463 (13) -- 103 563
Issuance of common stock.............. 75 -- 9 -- -- -- 9
Issuance of common stock for note
receivable.......................... 390 -- 53 (53) -- -- --
Repurchase of common stock............ (941) (1) (67) -- -- (652) (720)
Payments on notes receivable.......... -- -- -- 25 -- -- 25
Notes issued to stockholders.......... -- -- -- (700) -- -- (700)
Deferred stock compensation........... -- -- 482 -- (482) -- --
Amortization of deferred stock
compensation........................ -- -- -- -- 22 -- 22
Net income............................ -- -- -- -- -- 60 60
------ --- ------ ----- ------- ------- -------
Balance, December 31, 1998............ 9,217 9 940 (741) (460) (489) (741)
Issuance of common stock to purchase
Creative Business Solutions, Inc.
and HealthWeb Systems, Ltd. ........ 655 1 1,145 -- -- -- 1,146
Issuance of common stock to purchase
assets of Management & Technology
Solutions, Inc. .................... 60 -- 140 -- -- -- 140
Repurchase of common stock in exchange
of notes receivable from
stockholders........................ (563) (1) (3) 700 -- (696) --
Deferred stock compensation........... -- -- 5,817 -- (5,817) -- --
Amortization of deferred stock
compensation........................ -- -- -- -- 215 -- 215
Stock compensation.................... 53 53
Net loss.............................. -- -- -- -- -- (727) (727)
------ --- ------ ----- ------- ------- -------
Balance, June 30, 1999................ 9,369 $ 9 $8,092 $ (41) $(6,062) $(1,912) $ 86
====== === ====== ===== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 79
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM FOR THE YEAR SIX MONTHS ENDED
MAY 27, 1997 (DATE ENDED JUNE 30,
OF INCEPTION) TO DECEMBER 31, ----------------------
DECEMBER 31, 1997 1998 1998 1999
------------------- ------------ ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................. $ 103 $ 60 $ 32 $ (727)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Provision for doubtful accounts............. 204 203 101 135
Common stock issued for services rendered... 8 -- -- --
Amortization of deferred stock
compensation.............................. -- 22 -- 215
Write-off of acquired in-process
technology................................ -- -- -- 484
Forgiveness of note receivable.............. -- -- -- 32
Stock compensation.......................... -- -- -- 53
Deferred taxes.............................. (105) (83) -- (709)
Loss on disposal of property and
equipment................................. 130 187 -- --
Depreciation and amortization............... 24 161 78 648
Changes in assets and liabilities:
Accounts receivable....................... (762) (2,127) (1,186) (1,654)
Prepaid expenses and other current
assets................................. (99) (75) (201) 72
Income tax receivable..................... -- (406) (151) 406
Accounts payable.......................... (128) 32 450 967
Accrued liabilities....................... 614 976 765 1,870
Deferred revenue.......................... 247 (248) (165) --
Other long-term assets.................... -- (16) (146) (53)
----- ------- ------- -------
Net cash provided by (used in) operating
activities................................ 236 (1,314) (423) 1,739
----- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment and
software licenses........................... (121) (750) (350) (1,334)
Purchase of MedPartners' assets............... (2,630)
Acquisitions, net of cash acquired............ 614 -- -- (1,238)
----- ------- ------- -------
Net cash provided by (used in) investing
activities................................ 493 (750) (350) (5,202)
----- ------- ------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock........ 16 9 9 --
Proceeds from issuance of mandatorily
redeemable convertible preferred stock,
net......................................... -- 6,449 5,983 4,483
Repurchases of common stock................... -- (720) (720) --
Proceeds from issuance of notes payable....... 86 56 -- --
Payments of notes payable..................... (58) (32) (28) (267)
Payment on line of credit..................... -- -- -- (265)
Principal payments on capital leases.......... -- (15) -- (166)
Issuance of notes receivable.................. -- (800) (300) --
Repayment of notes receivable................. -- 25 -- 30
----- ------- ------- -------
Net cash provided by financing activities... 44 4,972 4,944 3,815
----- ------- ------- -------
Net increase in cash and cash equivalents....... 773 2,908 4,171 352
Cash and cash equivalents at beginning of
period........................................ -- 773 773 3,681
----- ------- ------- -------
Cash and cash equivalents at end of period...... $ 773 $ 3,681 $ 4,944 $ 4,033
===== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 80
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
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 in the healthcare industry. The Company also 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.
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.
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.
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.
F-7
<PAGE> 81
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
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:
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM MAY 27, 1997 SIX MONTHS ENDED
(DATE OF INCEPTION) YEAR ENDED JUNE 30,
TO DECEMBER 31, DECEMBER 31, ------------------
1997 1998 1998 1999
------------------- ------------ -------- ----
<S> <C> <C> <C> <C>
Revenues:
Company A..................... 40% 42% 28% 25%
Company B..................... 16% 11% 13% 24%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1998 1999
------------ ------------ --------
<S> <C> <C> <C> <C>
Accounts receivable:
Company A..................... 40% 56% 32%
Company B..................... 20% -- 11%
Company C..................... 13% -- --
Company D..................... -- -- 18%
</TABLE>
Fair value of financial instruments
Carrying amounts of certain of the Company's financial instruments
including cash and cash equivalents, 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.
Unaudited interim results
The accompanying interim consolidated financial statements for the six
months ended June 30, 1998, together with the related notes, are unaudited. The
unaudited interim financial statements have been prepared on the same basis as
the annual financial statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the Company's results of their operations and their cash flows
for the six months ended June 30, 1998.
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 and various deposit accounts.
Property and equipment
Property and equipment are stated at cost and are depreciated on a
straight-line basis over their estimated useful lives of five to 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
Intangible assets arose from the Company's acquisitions. Goodwill is being
amortized on a straight-line basis over seven years. Other intangible assets
consist of acquired work force and customer lists which
F-8
<PAGE> 82
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
are being amortized on a straight-line basis over their estimated useful lives
of 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 certain intangible assets 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.
Revenue recognition
Recurring revenue, or multi-year contractually based revenue, is recognized
monthly based upon volume of service transactions. Consulting revenue is
generally billed on a time and materials basis, and is recognized as the
consulting services are performed. Provisions for estimated losses on fixed fee
contracts are recorded when identified.
Research and development
Research and development costs are charged to operations as incurred.
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-9
<PAGE> 83
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
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.
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 income (loss)) and the
denominator (number of shares) used in the basic and diluted EPS calculations
(in thousands, except per share data):
<TABLE>
<CAPTION>
PERIOD FROM
MAY 27, 1997
(DATE OF SIX MONTHS ENDED
INCEPTION) TO YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -----------------
1997 1998 1998 1999
------------- ------------ ------- -------
<S> <C> <C> <C> <C>
BASIC:
Net income (loss)............................... $ 103 $ 60 $ 32 $ (727)
------ ------- ------- -------
Weighted average common shares outstanding...... 2,065 4,937 5,066 6,216
------ ------- ------- -------
Net income (loss) per share..................... $ 0.05 $ 0.01 $ 0.01 $ (0.12)
====== ======= ======= =======
DILUTED:
Net income (loss)............................... $ 103 $ 60 $ 32 $ (727)
------ ------- ------- -------
Weighted average common shares outstanding...... 2,065 4,937 5,066 6,216
Preferred stock................................. -- 2,888 1,437 --
Options to purchase common stock................ -- 305 -- --
Common stock subject to repurchase.............. 2,009 4,640 4,877 --
Warrants........................................ -- 13 -- --
------ ------- ------- -------
Total weighted common stock and common stock
equivalents.................................. 4,074 12,783 11,380 6,216
------ ------- ------- -------
Net income (loss) per share..................... $ 0.03 $ 0.00 $ 0.00 $ (0.12)
====== ======= ======= =======
ANTIDILUTIVE SECURITIES:
Preferred stock................................. -- -- -- 6,276
Options to purchase common stock................ -- -- 571 2,801
Common stock subject to repurchase.............. -- -- -- 1,705
Warrants........................................ 163 -- 163 163
------ ------- ------- -------
163 -- 734 10,945
====== ======= ======= =======
</TABLE>
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.
Recent accounting pronouncements
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, "Software for Internal Use,"
which provides guidance on accounting for the cost of
F-10
<PAGE> 84
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
computer software developed or obtained for internal use. SOP No. 98-1 is
effective for financial statements for fiscal years beginning after December 15,
1998. The Company does not expect that the adoption of SOP No. 98-1 will have a
material impact on its consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS No. 133 is
effective for 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. To
date, the Company has not engaged in derivative and hedging activities.
3. BALANCE SHEET ACCOUNTS
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1997 1998 1999
---- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
PROPERTY AND EQUIPMENT
Computer equipment........................................ $218 $ 633 $3,283
Furniture and fixtures.................................... 100 138 519
Equipment................................................. 48 191 617
Software.................................................. 83 142 1,276
Leasehold improvements.................................... 24 24 82
---- ------ ------
473 1,128 5,777
Less: Accumulated depreciation and amortization............. (19) (139) (523)
---- ------ ------
$454 $ 989 $5,254
==== ====== ======
</TABLE>
Included in computer equipment at December 31, 1998 and June 30, 1999 is
equipment acquired under capital leases totaling approximately $167,000 and
$1,652,000, respectively, and related accumulated amortization of $17,000 and
$190,000, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1997 1998 1999
---- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
INTANGIBLE ASSETS
Software licenses......................................... $ -- $ 54 $2,685
Goodwill.................................................. -- -- 1,424
Acquired workforce........................................ -- -- 609
Customer lists............................................ -- -- 398
---- ------ ------
-- 54 5,116
Less: Accumulated amortization.............................. -- (18) (285)
---- ------ ------
$ -- $ 36 $4,831
==== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 30,
1997 1998 1999
---- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
ACCRUED LIABILITIES
Accrued payroll and benefits.............................. $451 $1,285 $2,148
Accrued professional fees................................. 81 234 423
Other..................................................... 170 296 1,222
---- ------ ------
$702 $1,815 $3,793
==== ====== ======
</TABLE>
F-11
<PAGE> 85
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
4. NOTES PAYABLE AND LINE OF CREDIT
In December 1998, the Company entered into a financing agreement for
approximately $56,000 relating to premiums for business insurance. The amount is
due in nine monthly installments and bears interest at 9.75% per annum. The
financing company collateralized the loan by potential proceeds obtained from a
claim on the insurance (unearned insurance provisions, loss payments that reduce
the unearned premiums and any related interests arising from a state guarantee
fund). At December 31, 1998 and June 30, 1999, $52,000 and $13,000 were
outstanding under this credit facility, respectively.
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.
In connection with the acquisition of Creative Business Solutions, Inc. and
HealthWeb Systems, Ltd. in February 1999 (Note 10), 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.
In March 1999, the Company entered into a revolving line of credit
agreement with a financial institution. The line of credit has a total capacity
of $1,500,000 and expires in March 2000. Borrowings under the line of credit
bear interest at prime plus 0.50% (8.25% at June 30, 1999) and are
collateralized by substantially all of the assets of the Company. Interest is
payable monthly as it accrues. The line of credit agreement contains certain
covenants that the Company must adhere to during the term of the agreement
including restrictions on the payment of dividends. As of June 30, 1999, there
were no outstanding borrowings on the line of credit. The Company has
outstanding two standby letters of credit in the amounts of $85,000 and $38,000
which serve as security deposits for two of the Company's capital leases.
In May 1999, the Company entered into a financing agreement for
approximately $1,131,000. 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.
Future principal payments of notes payable at June 30, 1999 are as follows:
<TABLE>
<S> <C>
For the periods ending December 31,
1999................................................... $ 617
2000................................................... 623
2001................................................... 245
2002................................................... 119
2003................................................... 129
Thereafter............................................. 12
------
1,745
Less: Current portion....................................... 1,189
------
$ 556
======
</TABLE>
5. RELATED PARTY TRANSACTIONS
In August 1997, the Company issued a note payable to an officer of the
Company for $85,940. The note is due in four equal payments and a final lump-sum
payment and bears interest at 8% per annum. At
F-12
<PAGE> 86
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
December 31, 1997, there was approximately $28,000 outstanding under the note
payable to related party. The note was paid during 1998.
In September 1997, the Company entered into a $520,000 financing agreement,
bearing interest at 9% and payable quarterly beginning January 1, 1998. The
principal amount is 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
7). A member of the Company's Board of Directors owns 50% of the financing
company.
The Company has a note receivable for $100,000 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, 1998 and June 30,
1999, the note receivable from related party was $100,000 and $75,000,
respectively.
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 are collateralized by 200,000 and 362,319 shares of common
stock, bear annual interest at 8% and are payable in 1999, or earlier upon
employee termination. In May and June 1999, the Company repurchased the common
stock in exchange for the notes.
6. COMMITMENTS
The Company leases office space and equipment under noncancelable operating
and capital leases with various expiration dates through 2004. 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 period from May 27, 1997 (date of
inception) to December 31, 1997, for the year ended December 31, 1998 and for
the six months ended June 30, 1999 was $71,000, $192,000 and $329,000,
respectively. These amounts are net of sublease income of $36,000, $48,000 and
$12,000, respectively.
Future minimum lease payments under noncancelable operating and capital
leases at June 30, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
For the periods ending December 31,
1999....................................... $ 292 $ 690
2000....................................... 577 1,483
2001....................................... 577 1,417
2002....................................... 176 1,333
2003....................................... 53 835
Thereafter................................. 3 534
------ ------
Total minimum lease payments.................... 1,678 $6,292
======
Less: Amount representing interest.............. 207
------
Present value of capital lease obligations...... 1,471
Less: Current portion........................... 465
------
$1,006
======
</TABLE>
F-13
<PAGE> 87
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
7. STOCKHOLDERS' EQUITY
Common stock
At June 30, 1999, the Company had reserved sufficient shares of common
stock for issuance upon conversion of preferred stock and exercise of stock
options. Common stockholders are entitled to dividends as and when declared by
the Board of Directors subject to the prior rights of the preferred
stockholders. The holders of each share of common stock are entitled to one
vote. The Company issued shares of its common stock to certain employees under
restricted stock agreements. These restricted stock agreements grant the Company
repurchase rights which lapse upon attainment of full vesting by all
stockholders. Full vesting is scheduled to occur on or before April 20, 2000.
Additionally, the Company has a right of first refusal to purchase the common
stock which shall lapse upon the closing of an underwritten public offering of
the Company's common stock. At December 31, 1998 and June 30, 1999, 4,405,602
and 1,705,301 shares of common stock are subject to repurchase by the Company,
respectively.
Mandatorily redeemable convertible preferred stock
In April and October 1998, the Company issued an aggregate of 4,545,454
shares of Series A mandatorily redeemable convertible preferred stock
("convertible preferred stock") at $1.43 per share for gross proceeds of $6.5
million. In April 1999, the Company issued 1,730,770 shares of Series B
convertible preferred stock at $2.60 per share for gross proceeds of $4.5
million. The rights, preferences, and terms of each series of convertible
preferred stock follow:
REDEMPTION. The holders of Series A and Series B convertible preferred
stock are entitled on or at any time after March 31, 2004 with the approval of
at least 75% of the Series A and Series B convertible preferred stockholders,
voting together as a single class, to require the Company to redeem all or a
portion of their shares in three installments by paying in cash a sum equal to
the original purchase price per share plus all accrued but unpaid dividends.
Upon receipt of request for redemption of shares, the Company shall redeem such
shares either in full within 15 days or according to the following schedule: (i)
one-third of the requesting holders' shares within 15 days; (ii) one-third of
the requesting holders' shares on the first anniversary of the request; and
(iii) one-third of the requesting holders' shares on the second anniversary of
the request.
DIVIDENDS. The holders of shares of Series A and Series B convertible
preferred stock are entitled to receive dividends, out of any assets legally
available, prior and in preference to any declaration or payment of any dividend
on the common stock of the Company, at the rate of $0.1144 and $0.208 per share,
respectively, when, as and if declared by the Board of Directors. Dividends on
the Series A and Series B convertible preferred stock shall accrue if not paid,
whether or not the earnings of the Company in that previous fiscal year were
sufficient to pay such dividends in whole or in part.
LIQUIDATION. In the event of any liquidation, dissolution or winding up
for the Company, either voluntary or involuntary, the holders of Series A and
Series B convertible preferred stock are entitled to receive, prior and in
preference to any distribution of any of the assets of the Company to the
holders of common stock by reason of their ownership, an amount per share equal
to $1.43 and $2.60, respectively, for each outstanding share of convertible
preferred stock, as adjusted for stock splits, stock dividends or similar
events, plus any accrued but unpaid dividends on such shares. If the assets and
funds distributed among the holders of the Series A and Series B convertible
preferred stock are insufficient to permit the payment in the full preferential
amounts, then the entire assets and funds of the Corporation legally available
for distribution shall be distributed ratably among the holders of Series A and
Series B convertible preferred stock with each holder to receive an amount equal
to the aggregate assets to be
F-14
<PAGE> 88
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
distributed multiplied by the ratio of the aggregate liquidation preference of
all shares held by such holder over the aggregate liquidation preference of all
of the shares of convertible preferred stock outstanding.
After payment has been made to the holders of Series A and Series B
convertible preferred stock, any remaining assets and funds are to be
distributed among the holders of common stock ratably based on the number of
shares of common stock held by each stockholder.
MERGERS. A merger, reorganization or sale of all or substantially all of
the assets of the Company in which the stockholders of the Company immediately
prior to the transaction possess less than 50% of the voting power of the
surviving entity (or its parent) immediately after the transaction shall be
deemed to be a liquidation, dissolution or winding up.
VOTING. The holder of each share of Series A and Series B convertible
preferred stock is entitled to the number of votes equal to the number of shares
of common stock into which each share of Series A and Series B convertible
preferred stock could be converted, except as otherwise required by law, and has
voting rights and powers equal to the voting rights and powers of common stock.
The holder of Series A and Series B convertible preferred stock shall have the
right, voting together as a single class, to elect two members of the Board of
Directors. In addition, the holders of Series A and Series B convertible
preferred stock, voting together with members of common stock as one class,
shall be entitled to elect two additional directors.
CONVERSION. Each share of Series A and Series B convertible preferred
stock, at the option of the holder, is convertible into the number of fully paid
and nonassessable shares of common stock which results from dividing the
conversion price per share in effect for the preferred stock at the time of
conversion by the per share conversion value of such shares. The initial per
share conversion price of Series A and Series B convertible preferred stock is
$1.43 and $2.60, respectively. Conversion is automatic at its then effective
conversion price (i) immediately upon the closing of a sale of common stock by
the Company in an underwritten public offering pursuant to a registration
statement under the Securities Act of 1933, as amended, in which (a) the
aggregate gross proceeds exceed $15,000,000 and (b) the public offering price
equals or exceeds $6.50 per share, or (ii) at the election of the holders of
three-fourths of the then outstanding Series A and Series B convertible
preferred stock, voting together as a single class on an as-converted basis.
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 is 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.
F-15
<PAGE> 89
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
Activity under the Plan is as follows (in thousands, except per share
data):
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
SHARES -------------------------- WEIGHTED
AVAILABLE FOR NUMBER OF AGGREGATE AVERAGE
GRANT SHARES EXERCISE PRICE PRICE EXERCISE PRICE
------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
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........................... (1,694) 1,694 $0.25 - $2.60 1,792 1.06
Cancelled......................... 42 (42) $0.25 - $1.00 (13) 0.30
------ ----- ------------- ------ -----
Balances, June 30, 1999........... 1,199 2,801 $0.25 -$2.60 $2,074 $0.74
====== ===== ============= ====== =====
</TABLE>
The options outstanding and currently exercisable by exercise price at June
30, 1999 are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE AT
OPTIONS OUTSTANDING AT JUNE 30, 1999 JUNE 30, 1999
- ----------------------------------------------------------------------------- ------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF EXERCISE NUMBER REMAINING AVERAGE EXERCISE NUMBER AVERAGE EXERCISE
PRICE OUTSTANDING CONTRACTUAL LIFE (YEARS) PRICE OUTSTANDING PRICE
- ----------------- ----------- ------------------------ ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.25 1,577 9.32 $0.25 142 $0.25
$0.28 300 4.05 $0.28 -- $ --
$0.50 217 9.83 $0.50 -- $ --
$1.00 218 9.89 $1.00 -- $ --
$2.60 489 9.99 $2.60 -- $ --
----- ---
2,801 8.96 $0.74 142 $0.25
===== ===
</TABLE>
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 Incentive Stock Plan
been determined based on the fair value at the grant date for awards during 1998
and the six months ended June 30, 1999, consistent with the provisions of SFAS
No. 123, the Company's net income would have been as follows (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31, JUNE 30,
1998 1999
------------ ----------
<S> <C> <C>
Net income (loss), as reported...................... $ 60 $ (727)
Net income (loss), pro forma........................ $ 54 $ (739)
Net income (loss) per share, as reported:
Basic............................................. $0.01 $(0.12)
Diluted........................................... $0.00 $(0.12)
Net income (loss) per share, pro forma:
Basic............................................. $0.01 $(0.12)
Diluted........................................... $0.00 $(0.12)
</TABLE>
F-16
<PAGE> 90
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
Such pro forma disclosures may not be representative of future compensation cost
because options vest over several years and additional grants are anticipated to
be made each year.
At December 31, 1998 and June 30, 1999, options exercisable under the Plan
were none and 142,000, respectively. The weighted average fair values of options
granted during 1998 and the six months ended June 30, 1999 were $0.05 and $0.21,
respectively.
The fair value of each option grant is estimated on the date of grant using
the minimum value method with the following weighted average assumptions:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31, JUNE 30,
1998 1999
------------ ----------
<S> <C> <C>
Risk-free interest rate............................. 5.18% 5.28%
Expected life....................................... 4 years 4 years
Expected dividends.................................. -- --
</TABLE>
Deferred stock compensation
As of June 30, 1999, the Company recorded deferred compensation related to
options granted to employees in the total amount of $6.3 million, representing
the difference between the deemed fair value of the common stock, as determined
for accounting purposes, and the exercise price of the options at the date of
grant. Of this amount, $22,000 had been amortized in 1998, and approximately
$215,000 had been amortized in the first six months of 1999. The Company
amortizes deferred compensation over the vesting period of the underlying
option.
WARRANTS
In connection with the acquisition of Croghan & Associates (Note 10), the
Company issued a warrant to purchase 162,595 shares of the Company's common
stock an exercise price of $0.80 per share to replace an existing warrant to
purchase Croghan & Associates stock. The warrant expires on the earlier of (i)
the effective of an initial public offering of the Company's common stock, or
(ii) the effective date of a merger, sale of assets or other sale of the
Company. The value of the warrant determined using the Black-Scholes model was
not material.
F-17
<PAGE> 91
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
8. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
MAY 27, 1997 SIX MONTHS
(DATE OF INCEPTION) YEAR ENDED ENDED
TO DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1998 1999
------------------- ------------ ----------
<S> <C> <C> <C>
Current
Federal.................................... $156 $143 $ 677
State...................................... 23 22 114
---- ---- -----
179 165 791
---- ---- -----
Deferred
Federal.................................... (91) (71) (658)
State...................................... (14) (12) (105)
---- ---- -----
(105) (83) (763)
---- ---- -----
Total income tax provision................... $ 74 $ 82 $ 28
==== ==== =====
</TABLE>
The Company's effective tax rate differs from the statutory rate as shown
in the following schedule (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
MAY 27, 1997 SIX MONTHS
(DATE OF INCEPTION) YEAR ENDED ENDED
TO DECEMBER 31, DECEMBER 31, JUNE 30,
1997 1998 1999
------------------- ------------ ----------
<S> <C> <C> <C>
Tax provision at federal statutory rate.... $ 60 $ 48 $.(238)
State income taxes, net of federal
benefit.................................. 10 7 6
Nondeductible expenses..................... 3 23 280
Other...................................... 1 4 (20)
---- ---- -----
Tax provision.............................. $ 74 $ 82 $ 28
==== ==== =====
</TABLE>
Temporary differences which gave rise to significant portions of deferred
tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- JUNE 30,
1997 1998 1999
----- ----- --------
<S> <C> <C> <C>
Deferred tax assets:
Reserves and accruals................................... $ 96 $ 191 $ 864
Fixed assets............................................ 9 -- --
Other................................................... -- -- 21
----- ----- -----
Deferred tax assets....................................... $ 105 $ 191 $ 885
===== ===== =====
Deferred tax liabilities:
Deferred revenue........................................ (374) (374) (339)
Fixed assets............................................ -- (3) (23)
----- ----- -----
Deferred tax liabilities.................................. $(374) $(377) $(362)
===== ===== =====
</TABLE>
F-18
<PAGE> 92
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
9. EMPLOYEE BENEFIT PLAN
In January 1998, the Company adopted a plan (the "Plan") which qualifies
under Section 401(k) of the Internal Revenue Code of 1986. Eligible employees
may make voluntary contributions to the Plan of up to 20% 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 Plan's
inception.
10. ACQUISITIONS
On October 1, 1997, the Company acquired all of the outstanding common
stock of Croghan & Associates, Inc. ("Croghan & Associates"). The total purchase
price was approximately $436,000, which consisted of 5,800,895 shares of the
Company's common stock. The acquisition has been accounted for as a purchase and
results of its operations have been included in the consolidated financial
statements from the date of acquisition.
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 fair
market values on the acquisition date.
The purchase price of approximately $2.9 million consisted of approximately
$1.4 million in cash, 655,000 shares of common stock, notes payable of $270,000
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. Such shares, which will be held in escrow for a two-year
period, have been included in the purchase price allocation and the calculation
of earnings per share. Based upon an appraisal by an independent valuation firm,
the value of the 655,000 shares of common stock issued in the acquisition was
determined to be $1,146,000. The excess of the purchase price over the fair
market value of the net tangible assets acquired aggregated approximately
$2,548,000, of which $484,000 was allocated to acquired in-process technology
and $2,064,000 was allocated to goodwill and other intangible assets. An
independent appraisal was performed to determine the fair value of the
identifiable assets, including the portion of the purchase price attributed to
the acquired in-process technology. The income approach was used to value
acquired in-process technology, which includes an analysis of the completion
costs, cash flows, other required assets and risks associated with achieving
such cash flows. 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 to acquired in-process
technology. HealthWeb is expected to introduce the final product by the end of
1999. Approximately $650,000 in research and development had been spent up to
the date of the acquisition in an effort to develop the technology to produce a
commercially viable product. The future research and development expense
associated with the acquired in-process product was estimated to be
approximately $975,000 between July 1999 and the first quarter of 2000.
Currently, the Company knows of no developments which would lead it to change
its original assessment of the expected completion and commercial viability of
this project. At the date of acquisition, the only identifiable intangible
assets acquired were the technology under development, the acquired workforce
and customer list.
F-19
<PAGE> 93
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
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 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.
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):
<TABLE>
<CAPTION>
CREATIVE
CROGHAN & BUSINESS
ASSOCIATES SOLUTIONS
---------- ---------
<S> <C> <C>
Total current assets........................................ $1,236 $ 596
Property, plant, equipment and other noncurrent assets...... 511 175
Goodwill.................................................... -- 1,338
Other intangible assets..................................... -- 726
Acquired in-process technology.............................. -- 484
Total liabilities........................................... (1,311) (403)
------ ------
Total purchase price.............................. $ 436 $2,916
====== ======
</TABLE>
The following unaudited pro forma summary presents the consolidated results
of operations of the Company as if the acquisition of Croghan & Associates had
occurred on May 27, 1997, the date of inception for the Company (in thousands):
<TABLE>
<S> <C>
Net revenue................................................. $4,244
Net loss before extraordinary item.......................... $ (880)
Net income.................................................. $ 120
</TABLE>
The following unaudited pro forma summary presents the consolidated results
of operations of the Company as if the acquisition of Creative Business
Solutions occurred on January 1, 1998, giving effect to an acquisition
adjustment for amortization of goodwill and other intangibles and the write-off
of acquired in-process technology (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- ----------------
<S> <C> <C>
Net revenue...................................... $15,319 $13,050
Net loss......................................... $ (439) $ (287)
</TABLE>
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-20
<PAGE> 94
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
11. SUPPLEMENTAL CASHFLOW DISCLOSURES
<TABLE>
<CAPTION>
FOR THE PERIOD SIX MONTHS
FROM MAY 27, 1997 FOR THE YEAR ENDED
(DATE OF INCEPTION) ENDED JUNE 30,
TO DECEMBER 31, -------------
DECEMBER 31, 1997 1998 1998 1999
------------------- ------------ ---- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION
Cash paid for interest......................... 2 59 37 99
Cash paid for income taxes..................... 43 705 -- 33
NONCASH INVESTING AND FINANCING ACTIVITIES
Common stock issued for notes receivable..... 13 -- -- --
Common stock issued for Croghan &
Associates................................ 436 -- -- --
Assets acquired through capital lease........ -- 167 -- 1,484
Deferred stock compensation.................. -- 482 15 5,817
Common stock issued for notes receivable..... -- 53 53 --
Issuance of notes payable to acquire software
and software license...................... -- -- -- 1,690
Common stock issued for Creative Business
Solutions................................. -- -- -- 1,146
Notes payable issued for Creative Business
Solutions................................. -- -- -- 270
Repurchase of shares in exchange for
stockholder notes receivable.............. -- -- -- 700
Common stock issued to purchase assets of
Management and Technology Solutions,
Inc....................................... -- -- -- 140
</TABLE>
12. 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
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers.
The Company operates in two business segments: recurring or multi-year
contractually based revenue, and revenue generated via consulting agreements.
The recurring business is subscription based and provides customers with a
portion, or all, of their information technology and related business service
needs. The consulting business provides customers with solutions to their
connectivity and integration needs as well as technical support on an as needed
basis.
The Company evaluates performance and allocates resources based on gross
margin. 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 business units that 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's assets are all located in the United States, and all sales
were to customers located in the United States.
F-21
<PAGE> 95
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
13. UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY (DEFICIT) AND PRO FORMA NET INCOME
(LOSS) PER SHARE
If the offering contemplated by this prospectus is consummated, all of the
mandatorily redeemable convertible preferred stock outstanding as of the closing
date will automatically be converted into 6,276,224 shares of common stock based
on the shares of mandatorily redeemable convertible preferred stock outstanding
at June 30, 1999. Unaudited pro forma stockholders' equity (deficit) at June 30,
1999, as adjusted for the conversion of mandatorily redeemable convertible
preferred stock, is disclosed on the balance sheet.
Pro forma basic net income (loss) per share has been computed as described
in Note 2 and also gives affect to common equivalent shares from preferred stock
that will automatically convert upon the closing of the Company's initial public
offering (using the as-if-converted method) for 1998 and the six months ended
June 30, 1999.
A reconciliation of the numerator and denominator used in the calculation
of pro forma basic and diluted net income (loss) per share follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31, JUNE 30,
1998 1999
------------ ----------
<S> <C> <C>
Pro Forma Net Income (Loss) per share:
Basic:
Net income (loss)......................................... $ 60 $ (727)
Shares used in computing net income (loss) per share...... 4,937 6,216
Adjustment to reflect the assumed conversion of the
preferred stock........................................ 6,276 6,276
------- -------
Shares used in computing pro forma net income (loss) per
share.................................................. 11,213 12,492
------- -------
Pro forma net income (loss) per share..................... $ 0.01 $ (0.06)
======= =======
Diluted:
Net income (loss)......................................... $ 60 $ (727)
Shares used in computing net income (loss) per share...... 12,783 6,216
Adjustment to reflect the assumed conversion of the
preferred stock........................................ 3,388 6,276
------- -------
Shares used in computing pro forma net income (loss) per
share.................................................. 16,171 12,492
------- -------
Pro forma net income (loss) per share..................... $ 0.00 $ (0.06)
======= =======
</TABLE>
14. SUBSEQUENT EVENTS
Employee Stock Purchase Plan
In July 1999, the board of directors adopted the Employee Stock Purchase
Plan ("Stock Purchase Plan") to be effective upon completion of an initial
public offering. A total of 600,000 shares of common stock have been reserved
for issuance under the Stock Purchase Plan. 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. 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.
F-22
<PAGE> 96
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
The Stock Purchase Plan will be implemented by 12 month offerings with
purchases occurring at six month intervals commencing on the date of the
Company's initial public offering. 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. In the event of a proposed dissolution or
liquidation of the Company, the offering periods terminate immediately prior to
the consummation of the proposed action, unless otherwise provided by the
Company's board of directors. The Employee Stock Purchase Plan will terminate in
2009, unless sooner terminated by the board of directors.
In August 1999, the warrant to purchase 162,595 shares of common stock
(Note 7) was exercised raising proceeds of approximately $130,000.
F-23
<PAGE> 97
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Croghan & Associates, Inc.
In our opinion, the accompanying statements of operations, of stockholders'
equity and of cash flows present fairly, in all material respects, the results
of operations and cash flows of Croghan & Associates, Inc. for the year ended
December 31, 1996 and for the nine months ended September 30, 1997 in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards 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 the opinion expressed above.
Certain costs and expenses presented in the financial statements represent
allocations and management's estimates of the cost of services provided to
Croghan & Associates, Inc. As a result, the financial statements presented may
not be indicative of the results of operations that would have been achieved had
Croghan & Associates, Inc. operated as a non-affiliated entity.
PricewaterhouseCoopers LLP
San Jose, California
September 7, 1999
F-24
<PAGE> 98
CROGHAN & ASSOCIATES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------------- -------------
<S> <C> <C>
Revenue..................................................... $ 5,088,288 $ 3,880,699
Cost of revenue............................................. 4,068,148 3,608,783
----------- -----------
Gross profit................................................ 1,020,140 271,916
Operating expenses:
Selling general and administrative........................ 2,142,219 2,414,944
----------- -----------
Loss from operations........................................ (1,122,079) (2,143,028)
Other income (expense):
Interest income............................................. 20,778 14,892
Interest expense............................................ (1,340,660) (84,063)
----------- -----------
Loss before extraordinary item.............................. (2,441,961) (2,212,199)
Extraordinary item:
Gain on forgiveness of debt................................. -- 1,000,000
----------- -----------
Net loss.................................................... $(2,441,961) $(1,212,199)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 99
CROGHAN & ASSOCIATES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM JANUARY 1, 1996 TO SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK RETAINED DISTRIBUTION
(PAR VALUE - $0.001) ADDITIONAL EARNINGS IN EXCESS TOTAL
--------------------- PAID-IN (ACCUMULATED PARENT OF SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) EQUITY NET VALUE EQUITY
----------- -------- ---------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996... -- $ -- $ -- $ -- $ 10,261,446 $ -- $ 10,261,446
Net loss prior to
reorganization............. -- -- -- -- (2,201,569) -- (2,201,569)
Reorganization............... 3,200,000 3,200 -- -- (8,059,877) 8,056,677 --
Net loss subsequent to
reorganization............. -- -- -- (240,392) -- -- (240,392)
--------- ------ ------ ----------- ------------ ---------- ------------
Balance at December 31,
1996....................... 3,200,000 3,200 -- (240,392) -- 8,056,677 7,819,485
Issuance of common stock..... 6,273,844 6,274 3,570 -- -- -- 9,844
Net loss..................... -- -- -- (1,212,199) -- -- (1,212,199)
--------- ------ ------ ----------- ------------ ---------- ------------
Balance at September 30,
1997....................... 9,473,844 $9,474 $3,570 $(1,452,591) $ -- $8,056,677 $ 6,617,130
========= ====== ====== =========== ============ ========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 100
CROGHAN & ASSOCIATES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(2,441,961) $(1,212,199)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Provision for doubtful accounts........................ 662,721 88,000
Gain on debt forgiveness............................... -- (1,000,000)
Depreciation and amortization.......................... 1,854,668 1,210,164
Changes in current assets and liabilities:
Accounts receivable.................................. (321,691) (140,654)
Prepaid expenses and other current assets............ (271,251) 285,088
Accounts payable..................................... (147,171) 105,000
Accrued liabilities.................................. 371,704 (178,112)
Deferred revenue..................................... 899,984 (83,116)
Other long-term assets............................... 375 (4,500)
----------- -----------
Net cash provided by (used in) operating
activities..................................... 607,378 (930,329)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (440,627) (46,829)
----------- -----------
Net cash used in investing activities............. (440,627) (46,829)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... -- 9,844
Payments on notes payable................................. -- (70,000)
Proceeds from borrowings.................................. 1,590,000
----------- -----------
Net cash provided by (used in) financing
activities..................................... 1,590,000 (60,156)
----------- -----------
Net increase (decrease) in cash and cash equivalents........ 1,756,751 (1,037,314)
Cash and cash equivalents at beginning of period............ -- 1,756,751
----------- -----------
Cash and cash equivalents at end of period.................. $ 1,756,751 $ 719,437
=========== ===========
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 1,314,770 $ 109,953
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 101
CROGHAN & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. FORMATION AND BUSINESS OF THE COMPANY
Croghan & Associates, Inc. (the "Company" or "Croghan & Associates") is a
healthcare application services provider delivering proprietary software
applications. The Company implements, hosts and manages applications and
services on computing, networking and operating platforms.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements of Croghan & Associates include all the necessary
personnel costs and pro rata allocations of overhead from Banc One Corporation,
on a basis which management believes represents a reasonable allocation of such
costs. These charges comprise the parent company's net investment in Croghan &
Associates. Effective December 1, 1996, an officer of the Company assumed the
assets and liabilities of Croghan & Associates for no additional consideration.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported 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.
Concentration of credit risk
The following table summarizes the revenues from customers in excess of 10%
of the total revenues:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Company A.................................... 51% 33%
Company B.................................... 25% 13%
</TABLE>
Revenue recognition
Multi-year contractually based revenue is recognized monthly based on
volume of service transactions. Provisions for estimated losses on contracts are
recorded when identified.
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.
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
F-28
<PAGE> 102
CROGHAN & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
Recent accounting pronouncements
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, "Software for Internal Use,"
which provides guidance on accounting for the cost of computer software
developed or obtained for internal use. SOP No. 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. The Company does
not expect that the adoption of SOP No. 98-1 will have a material impact on its
consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS No. 133 is
effective for 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. To
date, the Company has not engaged in derivative and hedging activities.
NOTE 3. COMMITMENTS AND CONTINGENCIES
In December 1996, the Company began a self-insurance program to provide
medical benefits to its employees. Reserves for incurred but not reported claims
total $60,000 and $65,000 at December 31, 1996 and September 30, 1997,
respectively.
NOTE 4. STOCKHOLDERS' EQUITY
Warrants
The Company issued a warrant to purchase 243,893 shares of the Company's
common stock at an exercise price of $0.53 per share in connection with a
financing agreement. The warrant expires on the earlier of (i) the effective of
an initial public offering of the Company's common stock, or (ii) the effective
date of a merger, sale of assets or other sale of the Company. The value of the
warrant determined using the Black-Scholes model was not material.
Stock split
In January 1997, the Company's Board of Directors authorized a 16 to 1
stock split. Share information has been restated in the accompanying financial
statements to reflect the stock split for all periods presented.
NOTE 5. INCOME TAXES
There was no provision for income taxes for the year ended December 31,
1996 and the nine months ended September 30, 1997.
The Company's effective tax rate differs from the statutory rate as shown
in the following:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Tax provision at federal statutory rate............ 34% 34%
Change in valuation allowance...................... (34) (34)
---- ----
Tax provision...................................... --% --%
==== ====
</TABLE>
F-29
<PAGE> 103
CROGHAN & ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SEGMENT INFORMATION
The Company, which operates in a single industry segment, provides
healthcare application services. All of the Company's revenues are recorded for
services performed in the United States. Additionally, all of the Company's
assets are located in the United States.
F-30
<PAGE> 104
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Creative Business Solutions, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Creative
Business Solutions, Inc. and its subsidiary at December 31, 1997 and 1998, and
the results of their operations and their cash flows for each of the two years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards 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 the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
July 30, 1999
F-31
<PAGE> 105
CREATIVE BUSINESS SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 35,139 $ 71,990
Accounts receivable, less allowance for doubtful accounts
of $41,000 and $80,337................................. 461,906 419,084
Other current assets...................................... 17,107 4,180
-------- --------
Total current assets.............................. 514,152 495,254
Property and equipment, net................................. 188,301 175,267
Intangible assets, net...................................... -- 10,384
-------- --------
Total assets...................................... $702,453 $680,905
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 77,391 $ 95,595
Deferred revenue.......................................... -- 41,610
Line of credit............................................ 220,000 240,000
Notes payable............................................. 43,541 29,027
Deferred taxes............................................ 82,467 49,597
-------- --------
Total current liabilities......................... 423,399 455,829
-------- --------
Commitments (Note 7)
Minority interest........................................... 3,665 --
Stockholders' equity:
Common stock, $1.00 par value; 100,000 shares authorized;
Shares issued and outstanding: 9,824 in 1997 and
1998................................................... 9,824 9,824
Notes receivable from stockholders........................ (38,331) (30,000)
Retained earnings......................................... 303,896 245,252
-------- --------
Total stockholders' equity........................ 275,389 225,076
-------- --------
Total liabilities and stockholders' equity........ $702,453 $680,905
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE> 106
CREATIVE BUSINESS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1998
---------- ----------
<S> <C> <C>
Revenue..................................................... $3,598,201 $3,887,746
Cost of revenue............................................. 2,688,477 2,658,044
---------- ----------
Gross profit................................................ 909,724 1,229,702
---------- ----------
Operating expenses:
Research and development.................................. 185,629 376,076
Selling, general and administrative....................... 851,204 926,693
---------- ----------
Total operating expenses.......................... 1,036,833 1,302,769
Loss from operations........................................ (127,109) (73,067)
Minority interest........................................... 3,335 3,665
Interest income............................................. 2,939 64
Interest expense............................................ (10,553) (22,806)
---------- ----------
Loss before benefit from income taxes..................... (131,388) (92,144)
Benefit from income taxes................................... (43,302) (33,500)
---------- ----------
Net loss.................................................. $ (88,086) $ (58,644)
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE> 107
CREATIVE BUSINESS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE TOTAL
--------------- PAID-IN FROM RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL STOCKHOLDERS EARNINGS EQUITY
------ ------ ---------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997......... 9,574 $9,574 $ -- $ -- $ 430,774 $ 440,348
Issuance of common stock........... 1,000 1,000 4,000 -- -- 5,000
Issuance of common stock for cash
and note receivable.............. 250 250 14,262 (8,331) -- 6,181
Repurchase of common stock......... (1,000) (1,000) (18,262) -- (38,792) (58,054)
Notes issued to stockholders....... -- -- -- (30,000) -- (30,000)
Net loss........................... -- -- -- -- (88,086) (88,086)
------ ------ -------- -------- --------- ---------
Balance at December 31, 1997....... 9,824 9,824 -- (38,331) 303,896 275,389
Payment on note receivable......... -- -- -- 8,331 -- 8,331
Net loss........................... -- -- -- -- (58,644) (58,644)
------ ------ -------- -------- --------- ---------
Balance at December 31, 1998....... 9,824 $9,824 $ -- $(30,000) $ 245,252 $ 225,076
====== ====== ======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE> 108
CREATIVE BUSINESS SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1998
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (88,086) $ (58,644)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.......................... 42,965 71,291
Provision for doubtful accounts........................ 41,000 39,337
Minority interest in net losses of consolidated
subsidiary............................................ (3,335) (3,665)
Deferred taxes......................................... (48,101) (32,870)
Changes in current assets and liabilities:
Accounts receivable.................................. (58,382) 3,485
Other current assets................................. 5,013 12,927
Accounts payable and accrued liabilities............. (12,384) 18,204
Deferred revenue..................................... -- 41,610
--------- ---------
Net cash provided by (used in) operating
activities...................................... (121,310) 91,675
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition of property and equipment..................... (98,625) (57,360)
Acquisition of intangible assets.......................... -- (11,281)
--------- ---------
Net cash used in investing activities............. (98,625) (68,641)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 11,181 --
Repurchase of common stock................................ (14,513) --
Contribution from minority interest....................... 7,000 --
Proceeds from line of credit.............................. 220,000 20,000
Payments on notes payable................................. -- (14,514)
Issuance of note receivable............................... (30,000) --
Proceeds from payment on notes receivable................. -- 8,331
--------- ---------
Net cash provided by financing activities......... 193,668 13,817
--------- ---------
Net increase (decrease) in cash and cash equivalents........ (26,267) 36,851
Cash and cash equivalents at beginning of year.............. 61,406 35,139
--------- ---------
Cash and cash equivalents at end of year.................... $ 35,139 $ 71,990
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 10,553 $ 22,806
========= =========
NONCASH FINANCING ACTIVITIES:
Notes payable issued for repurchase of common stock....... $ 43,541 $ --
Common stock issued for note receivable................... 8,331 --
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE> 109
CREATIVE BUSINESS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. FORMATION AND BUSINESS OF THE COMPANY
Creative Business Solutions, Inc. (the "Company" or "Creative Business
Solutions"), was incorporated in Texas on May 6, 1991. The Company is engaged in
providing information technology consulting services and implementing automated
information technology solutions for clients with mission critical business
problems.
Creative Business Solutions formed a subsidiary, HealthWeb Systems, Ltd.,
("HealthWeb") on August 1, 1997 to develop web integrated software for the
healthcare industry. The Company owns 82.5% of HealthWeb.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation
The consolidated financial statements include the accounts of the Company
and its majority owned subsidiary, HealthWeb. Minority interest represents
minority stockholders' proportionate share of the equity in HealthWeb. All
intercompany balances and transactions have been eliminated in consolidation.
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 reported
period. Actual results could differ from those estimates.
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 two financial institutions. Deposits held with banks may exceed the
amount or insurance provided an such deposits. The Company has not experienced
any losses on its deposits of cash and cash equivalents. 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.
Fair value of financial instruments
Carrying amount of certain of the Company's financial instruments including
cash and cash equivalents, 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.
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 and various deposit accounts
Property and equipment
Property and equipment are stated at cost and are depreciated on a
straight-line method over their estimated useful lives of five to seven years.
Leasehold improvements are amortized over their estimated
F-36
<PAGE> 110
CREATIVE BUSINESS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Long-lived and intangible assets
Long-lived assets and certain intangible assets 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.
Revenue recognition
Consulting revenue is billed generally on a time and materials basis and is
recognized as the consulting services are performed.
Research and development
Research and development costs are charged to operations as incurred.
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.
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.
Recent accounting pronouncements
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 98-1, "Software for Internal Use,"
which provides guidance on accounting for the cost of computer software
developed or obtained for internal use. SOP No. 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. The Company does
not expect that the adoption of SOP No. 98-1 will have a material impact on its
consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. SFAS No. 133 is
effective for 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. To
date, the Company has not engaged in derivative and hedging activities.
F-37
<PAGE> 111
CREATIVE BUSINESS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1998
--------- ---------
<S> <C> <C>
PROPERTY AND EQUIPMENT
Furniture and fixtures............................. $ 39,011 $ 45,670
Machinery and equipment............................ 248,592 288,103
Software........................................... 33,315 33,315
Leasehold improvements............................. -- 11,190
--------- ---------
320,918 378,278
Less: Accumulated depreciation and amortization...... (132,617) (203,011)
--------- ---------
$ 188,301 $ 175,267
========= =========
INTANGIBLE ASSETS
Software licenses.................................. $ -- $ 11,281
Less: Accumulated amortization....................... -- (897)
--------- ---------
$ -- $ 10,384
========= =========
</TABLE>
4. NOTES PAYABLE AND LINE OF CREDIT
In October 1996, the Company entered into a revolving line of credit with a
financial institution. The line of credit has a total capacity of $325,000 and
expires in April 1999. Borrowings under the line of credit bear interest at the
bank's base rate plus 1.0% (9.75% at December 31, 1998) and are collateralized
by the Company's accounts receivable. Interest is payable monthly as it accrues.
The line of credit contains certain covenants that the Company must adhere to
during the term of the agreement. At December 31, 1997 and 1998, the Company had
outstanding borrowings of $220,000 and $240,000, respectively. The outstanding
balance was paid in full in April 1999.
In October 1997, the Company issued a promissory note to a shareholder for
$43,541 in exchange for 1,000 shares of common stock. The note accrues interest
monthly at 8.5% and the principal and related interest are payable quarterly
through October 2000. At December 31, 1997 and 1998, $43,541 and $29,027,
respectively, were outstanding under the promissory note. In connection with the
acquisition of the Company by the Trizetto Group, Inc. (Note 10) in February
1999, the remaining balance was paid in full.
5. COMMON STOCK
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 100,000 shares of $1.00 par value common stock. The Company has a right
of first refusal to purchase any common stock from a selling stockholder. If the
Company declines the right to repurchase shares, the continuing stockholders
have a right of first refusal to purchase such shares. This right lapses after
15 days from notification.
F-38
<PAGE> 112
CREATIVE BUSINESS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES
The benefit from income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
Current
Federal.................................................. $ -- $ --
State.................................................... -- --
-------- --------
-- --
-------- --------
Deferred
Federal.................................................. (40,272) (28,924)
State.................................................... (3,030) (4,576)
-------- --------
(43,302) (33,500)
-------- --------
Total income tax provision................................. $(43,302) $(33,500)
======== ========
</TABLE>
The Company's effective tax rate differs from the statutory rate as shown
in the following schedule:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
Tax benefit at federal statutory rate...................... $(44,676) $(31,348)
State income taxes, net of federal benefit................. (1,980) (3,300)
Nondeductible expenses..................................... 8,653 11,189
Tax credit carryforwards................................... (4,250) (8,134)
Other...................................................... (1,049) (1,907)
-------- --------
Tax benefit................................................ $(43,302) $(33,500)
======== ========
</TABLE>
Temporary differences which gave rise to significant portions of deferred
tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets and liabilities:
Net operating loss carryforwards.......................... $ 42,320 $ 24,319
Tax credit carryforwards.................................. 4,250 12,384
Fixed assets.............................................. 13,099 17,320
Accrual to cash adjustment................................ (142,136) (103,620)
--------- ---------
Deferred tax liabilities.................................... $ (82,467) $ (49,597)
========= =========
</TABLE>
7. LEASE COMMITMENTS
The Company leases its office space and certain equipment under
noncancelable operating leases with various expiration dates through 2001. The
Company is responsible for maintenance costs and property taxes on certain of
the operating leases. Rent expense for the year ended December 31, 1997 and 1998
was $55,689 and $87,476, respectively.
F-39
<PAGE> 113
CREATIVE BUSINESS SOLUTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1999........................................................ $70,151
2000........................................................ 10,912
2001........................................................ 1,860
-------
Total minimum lease payments...................... $82,923
=======
</TABLE>
8. EMPLOYEE BENEFITS PLAN
The Company sponsors a defined contribution plan which qualifies under
Section 401(k) of the Internal Revenue Code of 1986. Eligible employees may make
voluntary contributions to the plan of up to 15% of their annual compensation,
not to exceed the statutory limit, and the Company may make matching
contributions. There have been no Company contributions to the plan since its
inception.
9. NOTES RECEIVABLE FROM STOCKHOLDERS
In May, 1997 the Company loaned $30,000 to two officers under promissory
notes. The notes accrue interest annually at a rate of 6.5%. The principal
amount of $30,000 was forgiven by the Company as part of the purchase by The
TriZetto Group, Inc. (Note 10).
10. ACQUISITION
On February 5, 1999, all of the outstanding shares of the Company and
HealthWeb were purchased by The TriZetto Group, Inc. ("TriZetto"). The purchase
price of approximately $2.8 million consisted of approximately $1.4 million in
cash, 655,000 shares of TriZetto common stock and notes payable of $270,000.
11. SEGMENT INFORMATION
The Company, which operates in a single industry segment, provides
information technology consulting services. All of the Company's revenues are
recorded for services performed in the United States. Additionally, all of the
Company's assets are located in the United States.
F-40
<PAGE> 114
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
Effective February 5, 1999, the Company acquired all of the outstanding
shares of Creative Business Solutions and HealthWeb. 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 $2.9 million consisted of cash in the
amount of approximately $1.4 million, 655,000 shares of common stock with a
value of $1.75 per share, notes payable of $270,000, and acquisition costs of
approximately $100,000. Of the total purchase price, $484,000 has been allocated
to in-process technology and the remainder of the purchase price was allocated
to assets acquired and liabilities assumed.
The following unaudited pro forma combined condensed consolidated
statements of operations are derived from the historical consolidated financial
statements of the Company and Creative Business Solutions. The unaudited pro
forma combined condensed statements of operations for the year ended December
31, 1998 and for the six months ended June 30, 1999, give effect to the
acquisition of Creative Business Solutions as if it occurred on January 1, 1998.
For purposes of the unaudited pro forma combined condensed consolidated
statements of operations for the year ended December 31, 1998 and June 30, 1999,
the Company's results of operations have been combined with Creative Business
Solutions results of operations for such respective periods.
The unaudited pro forma combined condensed consolidated statements of
operations do not purport to represent what the Company's results of operations
would have been or what operations would be if the transactions that give rise
to the pro forma adjustments had occurred on the dates assumed and are not
necessarily indicative of future results. The unaudited pro forma combined
condensed consolidated statements of operations should be read in conjunction
with the historical consolidated financial statements and related notes of The
TriZetto Group, Inc. ("TriZetto") and Creative Business Solutions included
elsewhere herein.
F-41
<PAGE> 115
THE TRIZETTO GROUP, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
---------------------
CREATIVE
BUSINESS PRO FORMA PRO FORMA
TRIZETTO SOLUTIONS ADJUSTMENTS COMBINED
-------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues:
Recurring revenue.............................. $ 5,300 $ -- $ -- $ 5,300
Consulting revenue............................. 6,131 3,888 -- 10,019
------- ------ ----- -------
Total revenues.............................. 11,431 3,888 -- 15,319
------- ------ ----- -------
Cost of Revenues:
Recurring revenue.............................. 3,967 -- -- 3,967
Consulting revenue............................. 3,490 2,658 -- 6,148
------- ------ ----- -------
Total cost of revenues...................... 7,457 2,658 -- 10,115
------- ------ ----- -------
Gross profit..................................... 3,974 1,230 5,204
------- ------ -------
Operating expenses:
Research and development....................... 1,083 376 -- 1,459
Selling, general and administrative............ 2,885 927 381(1) 4,193
Amortization of deferred stock compensation.... 22 -- -- 22
------- ------ ----- -------
Total operating expenses.................... 3,990 1,303 381 5,674
------- ------ ----- -------
Income (loss) from operations.................... (16) (73) (381) (470)
Interest income.................................. 210 -- -- 210
Interest expense................................. (52) (23) (22)(3) (97)
Equity in loss of minority interest.............. 4 (4)(2) --
------- ------ ----- -------
Income before provision for taxes................ 142 (92) (407) (357)
Provision for income taxes....................... 82 (33) -- 49
------- ------ ----- -------
Net income (loss).............................. $ 60 $ (59) $(407) $ (406)
======= ====== ===== =======
Net income (loss) per share:
Basic.......................................... $ 0.01 $ (0.08)
Diluted........................................ $ 0.00 $ (0.03)
Number of shares used in computing net income
(loss) per share:
Basic.......................................... 4,937 4,937
Diluted........................................ 12,783 12,783
</TABLE>
See accompanying notes to pro forma combined condensed consolidated financial
statements.
F-42
<PAGE> 116
THE TRIZETTO GROUP, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
---------------------
CREATIVE
BUSINESS PRO FORMA PRO FORMA
TRIZETTO SOLUTIONS ELIMINATION(5) ADJUSTMENTS COMBINED
-------- --------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Recurring revenue................ $ 6,201 $ -- $ -- $ -- $ 6,201
Consulting revenue............... 6,508 1,879 (1,538) -- 6,849
------- ------ ------- ------ -------
Total revenues................ 12,709 1,879 (1,538) -- 13,050
------- ------ ------- ------
Cost of Revenues:
Recurring revenue................ 5,038 -- -- -- 5,038
Consulting revenue............... 4,109 1,360 (1,059) -- 4,410
------- ------ ------- ------ -------
Total cost of revenues........ 9,147 1,360 (1,059) -- 9,448
------- ------ ------- ------ -------
Gross profit....................... 3,562 519 (479) 3,602
------- ------ ------- -------
Operating expenses:
Research and development......... 440 345 (293) -- 492
Selling, general and
administrative................ 3,098 227 (229) 32(1) 3,128
Amortization of deferred
compensation.................. 215 -- 215
Write-off of acquired in-process
technology.................... 484 484 (484) (484)(4) --
------- ------ ------- ------ -------
Total operating expenses...... 4,237 1,056 (1,006) (452) 3,835
------- ------ ------- ------ -------
Income (loss) from operations...... (675) (537) 527 452 (233)
Interest income.................... 76 4 (4) -- 76
Interest expense................... (100) (5) 5 (2)(3) (102)
------- ------ ------- ------ -------
Income before provision for
taxes............................ (699) (538) 528 450 (259)
Provision for income taxes......... 28 -- -- 28
------- ------ ------- ------ -------
Net loss......................... $ (727) $ (538) $ 528 $ 450 $ (287)
======= ====== ======= ====== =======
Net Income (loss) per share
Basic............................ $ (0.12) $ (0.05)
======= =======
Diluted.......................... $ (0.12) $ (0.05)
======= =======
Number of shares used in computing
income (loss) per share:
Basic............................ 6,216 6,216
======= =======
Diluted.......................... 6,216 6,216
======= =======
</TABLE>
See accompanying notes to pro forma combined condensed consolidated financial
statements.
F-43
<PAGE> 117
THE TRIZETTO GROUP, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
SUMMARY OF TRANSACTION
In connection with TriZetto's acquisition of Creative Business Solutions
and HealthWeb, TriZetto exchanged approximately $1.4 million of cash, 655,000
shares of common stock, and notes payable of $270,000 for all of the outstanding
shares of Creative Business Solutions and HealthWeb and incurred acquisition
related expense of approximately $100,000.
The allocation of the purchase price was as follows (in thousands):
<TABLE>
<S> <C>
Allocation of purchase price:
Total current assets...................................... $ 637
Property, plant, equipment and other noncurrent asset..... 131
Goodwill(a)............................................... 1,440
Acquired workforce(b)..................................... 609
Other intangible assets................................... 117
Acquired in-process technology............................ 484
Total liabilities......................................... (502)
------
Total purchase price...................................... $2,916
======
</TABLE>
- ---------------
(a) Goodwill represents the excess of the purchase price over the fair
value of the net assets acquired and will be amortized over 7 years.
(b) Acquired workforce, consisting principally of Creative Business
Solution's and HealthWeb's software technicians, and was valued on a
replacement cost basis and will be amortized over a four year period,
the period of time TriZetto estimates it would benefit from the
workforce.
PRO FORMA ADJUSTMENTS
(1) To record the amortization of intangible assets resulting from the
allocation of the purchase price as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1998 1999
------------ --------------
<S> <C> <C>
Acquired workforce................................ $152 $ 76
Customer Lists.................................... 23 12
Goodwill.......................................... 206 103
---- ----
Total pro forma combined................ 381 191
Less amount recorded in post-acquisition
period....................................... -- 159
---- ----
Pro Forma adjustment............................ $381 $ 32
==== ====
</TABLE>
(2) To record the elimination of the loss from minority interest as if
HealthWeb was a wholly owned subsidiary as of January 1, 1998.
(3) To record the interest expense incurred on the $270,000 note payable
issued at the acquisition. This amount has been computed using an
interest rate of 8%, the stated interest rate on the note.
F-44
<PAGE> 118
(4) To eliminate value assigned to the acquired in-process technology. An
independent appraisal was performed to determine the fair value of the
identifiable assets, including the portion of the purchase price
attributed to the in-process technology. The income approach was used
to value acquired in-process technology, which includes an analysis of
the completion costs, cash flows, other required assets and risks
associated with achieving such cash flows. At the time of acquisition,
the Company determined the technological feasibility of the HealthWeb
product had not been established, and accordingly, wrote-off the amount
to acquired in-process technology.
(5) To eliminate the results of operations of Creative Business Solutions
for the period from February 5, 1999 to June 30, 1999, which were
included in the historical consolidated results of the Company.
F-45
<PAGE> 119
- ------------------------------------------------------
- ------------------------------------------------------
YOU MAY RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. NEITHER TRIZETTO
NOR ANY UNDERWRITER HAS AUTHORIZED ANYONE TO PROVIDE PROSPECTIVE INVESTORS WITH
DIFFERENT OR ADDITIONAL INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR
IS IT SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE
OFFER OR SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS
CORRECT ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE
DELIVERY OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES.
UNTIL NOVEMBER 1, 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN
THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
---------------------------------
TABLE OF CONTENTS
---------------------------------
<TABLE>
<S> <C>
Page
---
Prospectus Summary..................... 1
Risk Factors........................... 7
Forward-Looking Statements............. 16
Use of Proceeds........................ 17
Dividend Policy........................ 17
Capitalization......................... 18
Dilution............................... 19
Selected Consolidated Financial Data... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 22
Business............................... 34
Management............................. 52
Principal and Selling Stockholders..... 59
Certain Transactions................... 61
Description of Capital Stock........... 62
Shares Eligible for Future Sale........ 66
Underwriting........................... 68
Legal Matters.......................... 70
Experts................................ 70
Where You Can Find Additional
Information.......................... 71
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
[TRIZETTO GROUP LOGO]
4,200,000 SHARES
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE
ADAMS, HARKNESS & HILL, INC.
WIT CAPITAL CORPORATION
OCTOBER 7, 1999
- ------------------------------------------------------
- ------------------------------------------------------
