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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________________ TO __________________.
COMMISSION FILE NUMBER: 0-27501
THE TRIZETTO GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0761159
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
567 SAN NICOLAS DRIVE, SUITE 360
NEWPORT BEACH, CALIFORNIA 92660
(Address of Principal Executive Offices and Zip Code)
(949) 719-2200
(Registrant's Telephone Number, Including Area Code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934,
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
As of October 31, 2000, 33,859,897 shares of the issuer's common stock, $0.001
par value per share, were outstanding.
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FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets - as of
September 30, 2000 and December 31, 1999......................... 3
Unaudited Condensed Consolidated Statements of Operations
for the three and nine months ended September 30, 2000 and 1999.. 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 2000 and 1999............ 5
Notes to Unaudited Condensed Consolidated Financial Statements... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk ...... 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................ 17
Item 2. Changes in Securities and Use of Proceeds........................ 17
Item 4. Submission of Matters to a Vote of Security Holders.............. 17
Item 5. Other Information................................................ 18
Item 6. Exhibits and Reports on Form 8-K................................. 19
Signatures................................................................ 20
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE TRIZETTO GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 6,279 $ 18,849
Short-term investments ........................... 539 5,957
Accounts receivable, net ......................... 11,594 8,228
Prepaid expenses and other current assets ........ 3,291 1,801
Income tax receivable ............................ 453 440
-------- --------
Total current assets ......................... 22,156 35,275
Property and equipment, net .......................... 14,531 10,797
Long-term investments ................................ -- 1,230
Other assets ......................................... 4,094 265
Note receivable from related party ................... 264 525
Goodwill and other intangible assets, net ............ 20,116 20,326
-------- --------
Total assets ................................. $ 61,161 $ 68,418
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term note payable .......................... $ 4,249 $ 623
Capital lease obligations, current ............... 2,448 1,234
Accounts payable ................................. 3,421 3,102
Accrued liabilities .............................. 10,744 9,172
Income taxes payable ............................. 3 22
Deferred revenue ................................. 1,222 241
-------- --------
Total current liabilities .................... 22,087 14,394
Long-term notes payable .............................. 294 504
Capital lease obligations ............................ 4,254 2,224
Deferred revenue ..................................... 213 --
-------- --------
Total liabilities ............................ 26,848 17,122
-------- --------
Stockholders' equity:
Common stock ......................................... 21 20
Additional paid-in capital ........................... 72,774 66,215
Notes receivable from stockholders ................... (41) (41)
Deferred stock compensation .......................... (5,096) (5,786)
Other comprehensive loss ............................. (3) --
Accumulated deficit .................................. (33,342) (9,112)
-------- --------
Total stockholders' equity ................... 34,313 51,296
-------- --------
Total liabilities and stockholders' equity $ 61,161 $ 68,418
======== ========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements
3
<PAGE> 4
THE TRIZETTO GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
2000 1999 2000 1999
-------- ------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Recurring revenue ......................... $ 14,237 $ 5,640 $ 38,581 $ 11,841
Non-recurring revenue ..................... 5,170 3,386 16,302 9,894
-------- ------- -------- --------
Total revenues ................................ 19,407 9,026 54,883 21,735
-------- ------- -------- --------
Cost of revenues:
Recurring revenue ......................... 12,839 5,328 35,495 10,366
Non-recurring revenue ..................... 3,611 2,614 11,367 6,723
-------- ------- -------- --------
Total cost of revenues ........................ 16,450 7,942 46,862 17,089
-------- ------- -------- --------
Gross profit .................................. 2,957 1,084 8,021 4,646
-------- ------- -------- --------
OPERATING EXPENSES:
Research and development .................. 1,427 741 4,624 1,181
Selling, general and administrative ....... 8,768 2,275 26,163 5,373
Amortization of deferred stock compensation 310 412 1,202 627
Write-off of acquired in-process technology -- -- 536 484
-------- ------- -------- --------
Total operating expenses ...................... 10,505 3,428 32,525 7,665
-------- ------- -------- --------
Loss from operations .......................... (7,548) (2,344) (24,504) (3,019)
Interest income ............................... 315 44 922 120
Interest expense .............................. (466) (77) (647) (177)
-------- ------- -------- --------
Loss before provision for income taxes ........ (7,699) (2,377) (24,229) (3,076)
Income tax benefit ............................ -- (209) -- (181)
-------- ------- -------- --------
Net loss ...................................... $ (7,699) $(2,168) $(24,229) $ (2,895)
======== ======= ======== ========
Net loss per share:
Basic ..................................... $ (0.37) $ (0.28) $ (1.21) $ (0.42)
======== ======= ======== ========
Diluted ................................... $ (0.37) $ (0.28) $ (1.21) $ (0.42)
======== ======= ======== ========
Shares used in computing net loss per share:
Basic ..................................... 20,908 7,730 20,010 6,848
======== ======= ======== ========
Diluted ................................... 20,908 7,730 20,010 6,848
======== ======= ======== ========
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements
4
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THE TRIZETTO GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................... $(24,229) $(2,895)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for doubtful accounts .......................... 888 490
Amortization of deferred stock compensation .............. 1,202 627
Amortization of deferred expense ......................... 21 --
Write-off of acquired in-process technology .............. 536 484
Forgiveness of note receivable ........................... -- 32
Stock compensation ....................................... -- 53
Issuance of common stock in exchange for services rendered 12 --
Deferred taxes ........................................... -- (709)
Loss on disposal of property and equipment ............... 155 --
Depreciation and amortization ............................ 8,317 1,229
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable ...................................... (4,099) (1,890)
Prepaid expenses and other current assets ................ (739) (601)
Income tax receivable .................................... (13) 406
Note receivable .......................................... (226) --
Accounts payable ......................................... 290 1,008
Accrued liabilities ...................................... 1,371 2,782
Deferred revenue ......................................... 1,183 80
Other long-term assets ................................... (179) 11
-------- -------
Net cash provided by (used in) operating activities ........... (15,510) 1,107
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of short-term and long-term investments .... 9,391 --
Purchase of short-term and long-term investments .............. (2,743) --
Purchase of MedPartners' assets ............................... -- (2,630)
Payments for Erisco merger related costs ...................... (1,315) --
Purchase of property and equipment and software licenses ...... (4,623) (2,235)
Acquisitions, net of cash acquired ............................ (1,497) (1,238)
Increase in other assets ...................................... (933) --
-------- -------
Net cash used in investing activities ......................... (1,720) (6,103)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of mandatorily redeemable
convertible preferred stock, net ............................ -- 4,483
Payments on notes payable, net ................................ (703) (579)
Principal payments on capital leases .......................... (1,298) (279)
Repayment of notes receivable ................................. -- 30
Payments on line of credit .................................... (2,682) (265)
Proceeds from line of credit .................................. 6,756 --
Employee exercise of stock options ............................ 218 6
Deferred issuance costs ....................................... -- (247)
Proceeds from issuance of common stock, net ................... 515 --
Proceeds from equipment line of credit ........................ 1,855 --
-------- -------
Net cash provided by financing activities ..................... 4,661 3,149
-------- -------
Net decrease in cash and cash equivalents ..................... (12,569) (1,847)
Effect of exchange rate changes on cash and cash equivalents .. (1) --
Cash and cash equivalents, beginning of period ................ 18,849 3,681
-------- -------
Cash and cash equivalents, end of period ...................... $ 6,279 $ 1,834
======== =======
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements
5
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THE TRIZETTO GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PREPARATION
The accompanying unaudited condensed consolidated financial statements
have been prepared by The TriZetto Group, Inc. (the "Company") in accordance
with generally accepted accounting principles for interim financial information
that are consistent in all material respects with those applied in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1999 and
pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X
promulgated by the Securities and Exchange Commission (the "SEC"). Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and nine months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000, or for any future period. The financial statements and notes
should be read in conjunction with the consolidated financial statements and
footnotes thereto included in the Company's Form 10-K as filed with the SEC on
March 30, 2000.
2. COMPUTATION OF 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 loss) and
the denominator (number of shares) used in the basic and diluted EPS
calculations (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
BASIC:
Net loss ............................................... $ (7,699) $ (2,168) $(24,229) $ (2,895)
-------- -------- -------- --------
Weighted average common shares outstanding ............. 20,908 7,730 20,010 6,848
-------- -------- -------- --------
Net loss per share ..................................... $ (0.37) $ (0.28) $ (1.21) $ (0.42)
======== ======== ======== ========
DILUTED:
Net loss ............................................... $ (7,699) $ (2,168) $(24,229) $ (2,895)
-------- -------- -------- --------
Weighted average common shares outstanding ............. 20,908 7,730 20,010 6,848
Preferred stock ........................................ -- -- -- --
Options to purchase common stock ....................... -- -- -- --
Common stock subject to repurchase ..................... -- -- -- --
Warrants ............................................... -- -- -- --
-------- -------- -------- --------
Total weighted common stock and common stock equivalents 20,908 7,730 20,010 6,848
-------- -------- -------- --------
Net loss per share ..................................... $ (0.37) $ (0.28) $ (1.21) $ (0.42)
======== ======== ======== ========
ANTIDILUTIVE SECURITIES:
Preferred stock ........................................ -- 6,276 -- 6,276
Contingently issuable shares ........................... 535 -- 535 --
Options to purchase common stock ....................... 3,463 2,611 3,463 2,012
Common stock subject to repurchase ..................... -- 1,703 -- 2,898
Warrants ............................................... 300 -- 300 --
-------- -------- -------- --------
4,298 10,590 4,298 11,186
======== ======== ======== ========
</TABLE>
6
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THE TRIZETTO GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3. COMPREHENSIVE INCOME
The Company has adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 130, "Comprehensive Income." SFAS 130
establishes standards for reporting and display of comprehensive income and its
components for general-purpose financial statements. Comprehensive income is
defined as net income plus all revenues, expenses, gains and losses from
non-owner sources that are excluded from net income in accordance with generally
accepted accounting principles. For the nine months ended September 30, 2000,
the only item of comprehensive loss was $3 of foreign currency translation loss,
resulting in comprehensive net loss of $24.2 million. There were no material
differences between comprehensive and net income in any other periods presented.
4. SUPPLEMENTAL CASH FLOW DISCLOSURES
NINE MONTHS
ENDED
SEPTEMBER 30,
------------------
2000 1999
----- ------
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION
Cash paid for interest ............................... 451 51
Cash paid for income taxes ........................... 63 42
NONCASH INVESTING AND FINANCING ACTIVITIES
Assets acquired through capital lease .............. 2,688 1,694
Deferred stock compensation ........................ 515 6,380
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
Common stock issued for acquisition of Healthcare
Media Enterprises ................................ 3,500 --
Repurchase of shares in exchange for stockholder
note receivable .................................. -- 700
Common stock issued to purchase assets of Management
and Technology Solutions, Inc. ................... -- 140
Issuance of stock warrants ......................... 1,716 --
Goodwill adjustment for Finserv acquisition ........ 428 --
5. ACQUISITIONS
Healthcare Media Enterprises, Inc.
On January 11, 2000, the Company acquired all of the outstanding shares
of Healthcare Media Enterprises, Inc. ("HME"). HME's primary business focus is
on software development, especially relating to the Internet, web design, and
business to business portals. The purchase price of approximately $5.4 million
consisted of cash in the amount of approximately $1.4 million, 87,359 shares of
common stock with a value of $40.06 per share, assumed liabilities of $191,000
and acquisition costs of approximately $316,000. In connection with this
acquisition, 17,472 shares of the common stock are being held in escrow until
the resolution of certain pre-acquisition contingencies.
The acquisition 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 excess of the purchase price over the
fair market value of the assets purchased and liabilities assumed was $5.0
million, of which $536,000 was allocated to acquired in-process technology,
based upon an independent appraisal, and was expensed in the nine months ended
September 30, 2000, and $4.5 million was allocated to goodwill and intangible
assets consisting of assembled workforce, core technology and customer lists. As
of the acquisition date, HME was developing several enhancements to its
proprietary software products. The in-process and core technology was scheduled
to be released by the third quarter of 2000; however, the scheduled releases
have been extended into the fourth quarter of 2000.
7
<PAGE> 8
THE TRIZETTO GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In valuing HME's developed, in-process and core technologies, the
Company utilized the discounted cash flows method. The discounted cash flows
method includes an analysis of the completion costs, cash flows and risks
associated with achieving such cash flows. This income stream was tax effected
and discounted to its present value to estimate the value of the core and
in-process technologies. For purposes of this analysis, the Company used 20% and
25% discount rates for the core and in-process technologies, respectively. These
discount rates are consistent with the risks inherent in achieving the projected
cash flows.
The purchase price allocations were based on the estimated fair value
of the assets, less liabilities, on the date of purchases as follows (in
thousands):
Total current assets...................................... $ 336
Property, plant, equipment and other noncurrent assets.... 88
Goodwill.................................................. 3,532
Other intangible assets................................... 922
Acquired in-process technology............................ 536
------
Total purchase price.................................. $5,414
======
Erisco Managed Care Technologies, Inc.
On May 16, 2000, the Company entered into an Agreement and Plan of
Reorganization with Elbejay Acquisition Corp. ("Elbejay") a wholly owned
subsidiary of the Company, IMS Health Incorporated ("IMS HEALTH"), and Erisco
Managed Care Technologies, Inc. ("Erisco") pursuant to which Elbejay would merge
with and into Erisco resulting in Erisco becoming a wholly owned subsidiary of
the Company (the "Merger Agreement"). On October 2, 2000, the Company
consummated the transaction, and Erisco became a wholly owned subsidiary of the
Company. Erisco is a leading provider of software to the managed care industry.
The purchase price of approximately $211.9 million consisted of 12,142,857
shares of common stock with a value of $15.89 per share, assumed liabilities of
$9.4 million and acquisition costs of approximately $9.5 million.
The acquisition was accounted for using the purchase method of
accounting and accordingly, the purchase price was allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their
estimated fair market values on the acquisition date. The excess of the purchase
price over the estimated fair market value of the assets purchased and
liabilities assumed was $171.2 million, of which $3.7 million was allocated to
acquired in-process technology, based upon an independent appraisal, and will be
expensed in the three months ended December 31, 2000, and an estimated $167.5
million was allocated to goodwill and intangible assets consisting of assembled
workforce, core technology, trademarks and customer lists.
In valuing Erisco's developed, in-process and core technologies, the
Company utilized the discounted cash flows method. The discounted cash flows
method includes an analysis of the completion costs, cash flows and risks
associated with achieving such cash flows. This income stream was tax effected
and discounted to its present value to estimate the value of the core and
in-process technologies. For purposes of this analysis, the Company used 15% and
20% discount rates for the core and in-process technologies, respectively. These
discount rates are consistent with the risks inherent in achieving the projected
cash flows.
8
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THE TRIZETTO GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The preliminary purchase price allocations were based on the estimated
fair value of the assets, less liabilities, on the date of purchase as follows
(in thousands):
Total current assets........................................ $ 36,113
Property, plant, equipment and other noncurrent assets...... 4,523
Goodwill.................................................... 112,653
Other intangible assets..................................... 54,890
Acquired in-process technology.............................. 3,680
--------
Total purchase price..................................... $211,859
========
The Company anticipates making a final purchase price allocation in the
fourth quarter of 2000 based upon completion of management's assessment of the
fair vale of the assets, less liabilities.
The following unaudited pro forma summary presents the consolidated
results of operations of the Company as if the acquisitions of HME and Erisco
had occurred on January 1, 1999, giving effect to an acquisition adjustment for
amortization of goodwill and other intangibles and the write-off of acquired
in-process technology (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1999 SEPTEMBER 30, 2000
----------------- ------------------
<S> <C> <C>
Net revenue....................................... $ 85,591 $ 92,752
Net loss.......................................... $(48,258) $(48,776)
Earnings per share, basic and diluted............. $ (2.24) $ (1.52)
</TABLE>
6. LINE OF CREDIT
In September 2000, the Company executed a Secured Term Note with a
lending institution in the principal amount of $10.0 million. The Company
subsequently paid the outstanding balance on its existing line of credit of $2.7
million from borrowings under the Secured Term Note. Any outstanding principal
balance under the Secured Term Note was due and payable on the earlier to occur
of: (i) November 30, 2000 and (ii) the date on which the Company's acquisition
of Erisco was consummated. As of September 30, 2000, the Company had outstanding
borrowings under the Secured Term Note of $4.0 million. The Company repaid the
entire balance due under the Secured Term Note in October 2000.
In September 2000, the Company also entered into a Loan and Security
Agreement and Revolving Credit Note with the same lender, providing for a
revolving credit facility in the maximum principal amount of $15.0 million.
Subject to final approval by the lender, the revolving credit facility would
become effective upon repayment of any outstanding balance on the Secured Term
Note. In October 2000, the Loan and Security Agreement and Revolving Credit Note
were amended to include Erisco as an additional borrower, at which time the
revolving credit facility became effective. The revolving credit facility is
secured by all receivables of the Company and has a term of two years.
Borrowings under the revolving credit facility are limited to and shall
not exceed 80% of qualified accounts as defined in the Loan and Security
Agreement. Interest on the revolving credit facility is prime plus 1.5%. In
addition, there is a monthly 0.0333% usage fee and a monthly 0.083% loan
management fee. Interest is payable monthly in arrears on the first business day
of the month. The revolving credit facility contains certain covenants that the
Company must adhere to during the term of the agreement, including a net worth
of at least $25 million and the generation of a minimum monthly net earnings, as
defined in the Loan and Security Agreement, beginning in July 2001.
In December 1999, the Company entered into a lease line of credit with
a financial institution. This lease line of credit was specifically established
to finance computer equipment purchases. The lease line of credit has a limit of
$2.0 million and expires in December 2000. Borrowings under the lease line of
credit at September 30, 2000 totaled approximately $1.9 million, and are secured
by the assets under lease.
9
<PAGE> 10
THE TRIZETTO GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company also has outstanding letters of credit approximating $1.5
million. These letters of credit are held as security on the Company's leased
equipment.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") 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. SFAS 133
requires an entity to 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.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101
("SAB 101"), Revenue Recognition, which outlines the basic criteria that must be
met to recognize revenue and provides guidance for presentation of revenue and
for disclosure related to revenue recognition policies in financial statements
filed with the SEC. The Company believes that adopting SAB 101 will not have a
material impact on its financial position or results of operations.
In March 2000, the FASB issued Interpretation No. 44, or FIN 44,
"Accounting for Certain Transactions Involving Stock Compensation," which is an
interpretation of Accounting Principal Board No. 25. This interpretation
clarifies:
o the definition of employee for purposes of applying Opinion 25,
which deals with stock compensation issues;
o the criteria for determining whether a plan qualifies as a
noncompensatory plan;
o the accounting consequence of various modifications to the terms of
a previously fixed stock option or award; and
o the accounting for an exchange of stock compensation awards in a
business combination.
This interpretation is effective July 1, 2000, but certain conclusions
in this interpretation cover specific events that occur after either December
15, 1998 or January 12, 2000. To the extent that this interpretation covers
events occurring during the period after December 15, 1998 or January 12, 2000,
but before the effective date of July 1, 2000, the effects of applying this
interpretation are recognized on a prospective basis from July 1, 2000. The
adoption of FIN 44 did not have a material impact on the Company's financial
statements.
8. SUBSEQUENT EVENT
On November 2, 2000, the Company entered into an Agreement and Plan of
Merger by and among the Company, Cidadaw Acquisition Corp., a Delaware
corporation and a wholly owned subsidiary of the Company, Resource Information
Management Systems, Inc., an Illinois corporation ("RIMS"), the shareholders of
RIMS, Terry L. Kirch and Thomas H. Heimsoth, pursuant to which Cidadaw will
merge with and into RIMS resulting in RIMS becoming a wholly owned subsidiary of
the Company. In connection with the merger, the Company will issue an aggregate
of approximately 2,588,427 shares of its common stock, $.001 par value per
share, which will represent approximately 7.1% of the outstanding shares of the
Company's common stock after the completion of the merger, and will pay an
aggregate of $3,000,000 in cash, to the shareholders of RIMS. In addition, the
Company will assume approximately 300,000 options and will issue approximately
94,354 shares of restricted stock to certain RIMS' employees. Consummation of
the merger is subject to the approval by various third parties and federal
agencies and satisfaction of certain other closing conditions.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward-looking statements that have been made
pursuant to the provisions of the Private Securities Litigation Reform Act of
1995. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "may", "will", "should", "forecasts", "expects", "plans",
"anticipates", "believes", "estimates", "predicts", "potential", or "continue"
or the negative of such terms and other comparable terminology. These statements
are only predictions. Actual events or results may differ materially. In
evaluating these statements, you should specifically consider various factors,
including the risks outlined in our Form 10-K under the caption "risk factors."
These factors may cause our actual events to differ materially from any
forward-looking statement. We do not undertake to update any forward-looking
statement.
OVERVIEW
We are a leading provider of Internet-enabled application services,
e-business platforms and software engines for the healthcare industry. We offer
our products and services through the following three strategic business units:
ASP Solutions, HealthWeb and HealtheWare. As a multi-vendor application services
provider ("ASP"), we offer pre-integrated, remotely hosted third party and
proprietary applications and related services to our customers for a predictable
fee through our ASP Solutions unit. We operate and maintain these applications
in our Customer Connectivity Centers on most of the widely used computing,
networking and operating platforms. Our ASP Solutions unit also offers business
operations and applications integration consulting services, including
information technology assessment and software design, development and
implementation. HealthWeb, our e-business platform, facilitates information
exchange and e-commerce among all healthcare participants: providers, health
plans, employers and health plan members. We provide a leading client/server
system for payer managed care administration through HealtheWare, our software
engines unit.
Our revenues are classified into two categories: recurring or
multi-year contractually based revenue, and revenue generated via non-recurring
agreements. For the third quarter of 2000, the relative percentages of recurring
revenue and non-recurring revenue were 73% and 27%, respectively. For the nine
months ended September 30, 2000, the relative percentages of recurring revenue
and non-recurring revenue were 70% and 30%, respectively. Once the operations of
Erisco are fully integrated, we expect the relative percentage of recurring
revenue to decrease to approximately 60%. Thereafter, as we sign additional
multi-year application services contracts, we expect the relative percentage of
recurring revenue to continue to increase.
Recurring revenue is subscription based and billed on a monthly basis
over a contract term of typically from three to seven years. The amount billed
monthly is based on units of volume, such as numbers of physicians, members or
desktops covered by each contract. Recurring revenue is recognized ratably over
the term of the contract, and cash received in excess of revenue recognized is
recorded as deferred revenue. Non-recurring revenue is billed on either a time
and materials or a fixed fee basis, and is recognized as the non-recurring
services are performed.
Cost of revenues are those costs related to the products and services
we provide to our customers, and costs associated with the operation and
maintenance of our Customer 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, 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
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personnel, increase our marketing and promotional activities and incur costs
related to being a public company, such as directors' and officers' insurance
premiums and professional fees.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 2000 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1999
REVENUES. Total revenues in the third quarter of 2000 increased $10.4
million, or 115.0%, to $19.4 million from $9.0 million for the same period in
1999. The majority of this increase was due to the overall growth in both
recurring revenue and non-recurring revenue throughout the three-month period
ended September 30, 2000. Additionally, the acquisition of Novalis Corporation
in November 1999, Finserv Health Care Systems, Inc. in December 1999, and
Healthcare Media Enterprises, Inc. ("HME") in January 2000, generated
approximately $5.9 million in revenue in the third quarter of 2000.
Recurring revenue in the third quarter of 2000 increased $8.6 million,
or 152.4%, to $14.2 million from $5.6 million for the same period in 1999. Of
this increase, $5.1 million was generated from the acquisitions of Novalis and
Finserv. The remaining $3.5 million increase was related to the overall increase
in demand for our services due to expansion of our service offerings.
Non-recurring revenue in the third quarter of 2000 increased $1.8
million, or 52.7%, to $5.2 million from $3.4 million for the same period in
1999. Of this increase, the acquisitions of Novalis, Finserv and HME resulted in
non-recurring revenue of $795,000 in the third quarter 2000. The remaining
increase of $1.0 million reflected an overall increase in demand for our
consulting services throughout the three months ended September 30, 2000.
COST OF REVENUES. Cost of revenues in the third quarter 2000 increased
$8.5 million, or 107.1%, to $16.5 million from $8.0 million for the same period
in 1999. This increase was due to the costs incurred to support the overall
expansion of our business, including our acquisitions of Novalis, Finserv and
HME. As a percentage of total revenues, cost of revenues approximated 84.8% in
the third quarter of 2000 and 88.0% in the third quarter of 1999.
Cost of recurring revenue in the third quarter of 2000 increased $7.5
million, or 141.0%, to $12.8 million from $5.3 million for the same period in
1999. This increase represented the incremental expenses for personnel and
facilities costs incurred to support the growing application services provider
business, including the incremental costs associated with the acquisitions of
Novalis and Finserv. As a percentage of recurring revenue, cost of recurring
revenue approximated 90.2% in the third quarter of 2000 and 94.5% in the third
quarter of 1999.
Cost of non-recurring revenue in the third quarter of 2000 increased
$1.0 million, or 38.1%, to $3.6 million from $2.6 million for the same period in
1999. This increase was due to incremental costs required to support increasing
demand for our consulting services in the three months ended September 30, 2000,
including costs associated with the acquisitions of Novalis, Finserv and HME. As
a percentage of non-recurring revenue, cost of non-recurring revenue
approximated 69.8% in the third quarter of 2000 and 77.2% in the third quarter
of 1999.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in
the third quarter of 2000 increased $686,000, or 92.6%, to $1.4 million from
$741,000 for the same period in 1999. The increase was primarily due to a
significant increase in the amount of resources engaged in the development of
our applications and services. Expenses relating to system enhancements from
which we derive revenue are not classified as research and development and are
included in cost of revenues. As a percentage of total revenues, research and
development expenses approximated 7.4% in the third quarter of 2000 and 8.2% in
the third quarter of 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in the third quarter of 2000 increased $6.5 million, or
285.4%, to $8.8 million from $2.3 million for the same period in 1999. This
increase was due primarily to expansion of the sales force, staff growth in
management and administrative support areas, expansion of internal
infrastructure, and expansion of related office space. As a percentage of total
revenues, selling, general and administrative expenses approximated 45.2% in the
third quarter of 2000 and 25.2% in the third quarter of 1999.
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AMORTIZATION OF DEFERRED STOCK COMPENSATION. Amortization of deferred
stock compensation decreased $102,000 in the third quarter of 2000 to $310,000
from $412,000 for the same period in 1999. The decrease resulted from an
adjustment for the forfeiture of options. 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 our employees.
INTEREST INCOME. Interest income in the third quarter of 2000 increased
$271,000, or 615.9%, to $315,000 from $44,000 for the same period in 1999. The
increase was due to the increase in cash available for investing due to proceeds
received from our initial public offering in October 1999.
INTEREST EXPENSE. Interest expense in the third quarter of 2000
increased $389,000, or 505.2%, to $466,000 from $77,000 for the same period in
1999. The increase was primarily due to borrowings under our line of credit and
new term note and additional borrowings on new capital lease agreements.
INCOME TAX BENEFIT. The income tax benefit for the three months ended
September 30, 2000 was zero, a decrease of $209,000 from an income tax benefit
of $209,000 for the same period in 1999. In 1999, we took a credit for a
previously accrued income tax provision, and an income tax provision or benefit
was not recorded in the third quarter of 2000 due to our pre-tax loss.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES. Total revenues in the first nine months of 2000 increased
$33.2 million, or 152.5%, to $54.9 million from $21.7 million for the same
period in 1999. The majority of this increase was due to the overall growth in
both recurring revenue and non-recurring revenue throughout the nine month
period ended September 30, 2000. Additionally, the acquisitions of Novalis in
November 1999, Finserv in December 1999, and HME in January 2000 generated
approximately $17.8 million in incremental revenue for the first nine months of
2000.
Recurring revenue in the first nine months of 2000 increased $26.8
million, or 225.8%, to $38.6 million from $11.8 million for the same period in
1999. Of this increase, $13.2 million was generated from the acquisitions of
Novalis and Finserv. The remaining $13.5 million increase was related to the
overall increase in demand for our services due to expansion of our service
offerings.
Non-recurring revenue in the first nine months of 2000 increased $6.4
million, or 64.8% to $16.3 million from $9.9 million for the same period in
1999. This increase was primarily due to the acquisition of Novalis, Finserv and
HME, which resulted in incremental non-recurring revenue of $4.5 million for the
nine months ended September 30, 2000. The remaining increase of $1.9 million
reflected an overall increase in demand for our consulting services throughout
the nine months ended September 30, 2000.
COST OF REVENUES. Cost of revenues in the first nine months of 2000
increased $29.8 million, or 174.2%, to $46.9 million from $17.1 million in the
first nine months of 1999. This increase was due to the costs incurred to
support the overall expansion of our business, including our acquisitions of
Novalis, Finserv and HME. As a percentage of total revenues, cost of revenues
approximated 85.4% in the first nine months of 2000 and 78.6% in the first nine
months of 1999.
Cost of recurring revenue in the first nine months of 2000 increased
$25.1 million, or 242.4%, to $35.5 million from $10.4 million in the first nine
months of 1999. This increase represented the incremental expenses for personnel
and facilities costs incurred to support the growing application services
provider business, including the incremental costs associated with the
acquisitions of Novalis and Finserv. As a percentage of recurring revenue, cost
of recurring revenue approximated 92.0% in the first nine months of 2000 and
87.5% in the first nine months of 1999.
Cost of non-recurring revenue in the first nine months of 2000
increased $4.7 million, or 69.1%, to $11.4 million from $6.7 million in the
first nine months of 1999. This increase was due to incremental costs required
to support increasing demand for our consulting services in the first nine
months of 2000. As a percentage of non-recurring revenue, cost of non-recurring
revenue approximated 69.7% for the first nine months of 2000 and 68.0% for the
same period in 1999.
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RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in
the first nine months of 2000 increased $3.4 million, or 291.5%, to $4.6 million
from $1.2 million for the same period in 1999. The increase was primarily due to
a significant increase in the amount of resources engaged in the development of
our applications and services. Expenses relating to system enhancements from
which we derive revenue are not classified as research and development and are
included in cost of revenues. As a percentage of total revenues, research and
development expenses approximated 8.4% for the first nine months of 2000 and
5.4% for the same period in 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in the first nine months of 2000 increased $20.8
million, or 387%, to $26.2 million from $5.4 million for the same period in
1999. This increase was due primarily to expansion of the sales force, staff
growth in management and administrative support areas, and expansion of related
office space. As a percentage of total revenues, selling, general and
administrative expenses approximated 47.7% for the first nine months of 2000 and
24.7% for the same period in 1999.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. Amortization of deferred
stock compensation increased $575,000 in the first nine months of 2000 to $1.2
million from $627,000 for the same period in 1999. This increase is primarily
related to stock options which were granted throughout 1999 and were outstanding
for the nine months ended September 30, 2000. 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 our employees.
WRITE OFF OF ACQUIRED IN-PROCESS TECHNOLOGY. Write off of acquired
in-process technology increased $52,000 in the first nine months of 2000 to
$536,000 from $484,000 for the same period in 1999. The expense related to the
write off of acquired in-process technology in the first nine months of 2000 was
the result of our acquisition of HME, in which the excess of the purchase price
over the fair market value of the assets assumed was $5.0 million. Of this
amount, $536,000 was allocated to acquired in-process technology, based upon an
independent appraisal, and was expensed in the nine months ended September 30,
2000. Our acquisition of Creative Business Solutions and HealthWeb Systems in
February 1999 resulted in an excess of purchase price over the fair market value
of the assets purchased and liabilities assumed of $2.5 million. Of this amount,
$484,000 was allocated to acquired in-process technology, based upon an
independent appraisal, and was written-off in the nine months ended September
30, 1999.
INTEREST INCOME. Interest income in the first nine months of 2000
increased $802,000 or 668.3%, to $922,000 from $120,000 in the first nine months
of 1999. The increase was due to the increase in cash available for investing
due to proceeds received from our initial public offering.
INTEREST EXPENSE. Interest expense in the first nine months of 2000
increased $470,000, or 265.5%, to $647,000 from $177,000 for the same period in
1999. The increase was primarily due to borrowings under our line of credit and
new term note and additional borrowings on new capital lease agreements.
INCOME TAX BENEFIT. The income tax benefit in the first nine months of
2000 was zero, a decrease of $181,000 from the income tax benefit of $181,000
for the same period in 1999. In 1999, we took a credit for a previously accrued
income tax provision, and an income tax provision was not recorded in the first
nine months of 2000 due to our pre-tax loss.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through a
combination of cash from operations, private financings and an initial public
offering of our common stock. As of September 30, 2000, we had approximately
$6.8 million of cash, cash equivalents, short-term investments and long-term
investments.
Cash used in operating activities in the nine months ended September
30, 2000 was $15.5 million. Cash used during this period was primarily
attributable to net losses of $24.2 million, which were partially offset by
non-cash items of $8.7 million, consisting of depreciation and amortization,
provision for doubtful accounts, disposal of property and equipment,
amortization of deferred expense, amortization of deferred stock compensation,
write off of in-process technology, as well as other changes in operating asset
and liability accounts. These losses were the result of increased research and
development expenses, selling, general and administrative expenses, and the
expansion of our infrastructure to support growing demand of our recurring line
of business.
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Cash used in investing activities in the nine months ended September
30, 2000 was $787,000. Cash used during this period was primarily the result of
our purchase of $4.6 million in property and equipment and software licenses,
the $1.5 million cash portion (net of cash acquired) of our acquisition of HME,
the $1.3 million cash payment of acquisition costs related to Erisco, the
increase of other assets of $933,000 and our purchase of $2.8 million of
short-term and long-term investments. These expenditures, totaling $10.2
million, were partially offset by the cash generated from the sale of $9.4
million of short-term and long-term investments.
Cash provided by financing activities in the nine months ended
September 30, 2000 was $4.7 million. The cash provided during this period was
primarily the result of proceeds from our line of credit of $6.8 million,
proceeds from our equipment line of credit of $1.8 million, and the proceeds
received from issuance of common stock related to employee exercise of stock
options and employee purchase of common stock of $733,000, offset by principal
payments on notes payable and capital lease obligations of $2.0 million, and
payments on the line of credit of $2.7 million.
In September 2000, we executed a Secured Term Note with a lending
institution in the principal amount of $10.0 million. We subsequently paid the
outstanding balance on our existing line of credit of $2.7 million from
borrowings under the Secured Term Note. Any outstanding principal balance under
the Secured Term Note was due and payable on the earlier to occur of: (i)
November 30, 2000 and (ii) the date on which our acquisition of Erisco was
consummated. As of September 30, 2000, we had outstanding borrowings under the
Secured Term Note of $4.0 million. We repaid the entire balance due under the
Secured Term Note in October 2000.
In September 2000, we also entered into a Loan and Security Agreement
and Revolving Credit Note with the same lender, providing for a revolving credit
facility in the maximum principal amount of $15.0 million. Subject to final
approval by the lender, the revolving credit facility would become effective
upon repayment of any outstanding balance on the Secured Term Note. In October
2000, the Loan and Security Agreement and Revolving Credit Note were amended to
include Erisco as an additional borrower, at which time the revolving credit
facility became effective. The revolving credit facility is secured by all of
our receivables and has a term of two years.
Borrowings under the revolving credit facility are limited to and shall
not exceed 80% of qualified accounts as defined in the Loan and Security
Agreement. Interest on the revolving credit facility is prime plus 1.5%. In
addition, there is a monthly 0.0333% usage fee and a monthly 0.083% loan
management fee. Interest is payable monthly in arrears on the first business day
of the month. The revolving credit facility contains certain covenants that we
must adhere to during the term of the agreement, including a net worth of at
least $25 million and the generation of a minimum monthly net earnings, as
defined in the Loan and Security Agreement, beginning in July 2001.
In December 1999, we entered into a lease line of credit with a
financial institution. This lease line of credit was specifically established to
finance computer equipment purchases. The lease line of credit has a limit of
$2.0 million and expires in December 2000. Borrowings under the lease line of
credit at September 30, 2000 totaled approximately $1.9 million, and are secured
by the assets under lease.
We also have outstanding letters of credit approximating $1.5 million.
These letters of credit are held as security on our leased equipment.
Based upon our current operating plan, we believe existing cash
balances (including the $32 million obtained in connection with our October 2000
acquisition of Erisco), cash generated from operations and future borrowings
will be sufficient to meet our working capital and capital requirements for at
least the next 12 months. Nevertheless, we may seek additional financing through
available means, which may include debt and/or equity financing or funding
through third party agreements. There can be no assurance that any additional
financing will be available on acceptable terms, if at all. Any equity
financing may result in dilution to existing stockholders and any debt
financing may include restrictive covenants.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") 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. SFAS 133
requires an entity to recognize all derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at fair
value. To date, we have not engaged in derivative and hedging activities.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition, which
outlines the basic criteria that must be met to recognize revenue and provides
guidance for presentation of revenue and for disclosure related to revenue
recognition policies in financial statements filed with the SEC. We believe that
adopting SAB 101 will not have a material impact on our financial position or
results of operations.
In March 2000, the FASB issued Interpretation No. 44, or FIN 44,
"Accounting for Certain Transactions Involving Stock Compensation," which is an
interpretation of Accounting Principal Board No. 25. This interpretation
clarifies:
o the definition of employee for purposes of applying Opinion 25,
which deals with stock compensation issues;
o the criteria for determining whether a plan qualifies as a
noncompensatory plan;
o the accounting consequence of various modifications to the terms of
a previously fixed stock option or award; and
o the accounting for an exchange of stock compensation awards in a
business combination.
This interpretation is effective July 1, 2000, but certain conclusions
in this interpretation cover specific events that occur after either December
15, 1998 or January 12, 2000. To the extent that this interpretation covers
events occurring during the period after December 15, 1998 or January 12, 2000,
but before the effective date of July 1, 2000, the effects of applying this
interpretation are recognized on a prospective basis from July 1, 2000. The
adoption of FIN 44 did not have a material impact on our financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial
position, operating results or cash flows due to adverse changes in financial
and commodity market prices and rates. We are exposed to market risk due to
changes in United States interest rates. This exposure is directly related to
our normal operating and funding activities. Historically, and as of September
30, 2000, we have not used derivative instruments or engaged in hedging
activities.
The interest payable on our $3.0 million credit facility is variable,
based on the LIBOR rate, and, therefore, is affected by changes in market
interest rates. As of September 30, 2000, there was no outstanding balance on
our $3.0 million credit facility. The $3.0 million credit facility expires in
November 2000.
The interest payable on our $10.0 million Secured Term Note is
variable, based on the LIBOR rate plus 3%. As of September 30, 2000, we had
outstanding borrowings under the Secured Term Note of $4.0 million. The interest
payable on our $15.0 million revolving credit facility, which became effective
in October 2000, is prime plus 1.5%. In addition, there is a monthly 0.0333%
usage fee and a monthly 0.083% loan management fee. The revolving credit
facility expires in September 2002. Changes in interest rates have no impact on
our other debt as all of our other notes are at fixed interest rates between 8%
and 10%.
We manage interest rate risk by investing excess funds in cash
equivalents and short-term investments bearing variable interest rates, which
are tied to various market indices. As a result, we do not believe that
near-term changes in interest rates will result in a material effect on our
future earnings, fair values or cash flows.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. As of the date
of this report, we are not a party to any legal proceedings, the adverse outcome
of which, in management's opinion, individually or in the aggregate, would have
a material adverse effect on our results of operations or financial position.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
RECENT SALES OF UNREGISTERED SECURITIES. On August 14, 2000, we issued
417 shares of our common stock to Burns McClellan, Inc. in connection with
services rendered. On September 12, 2000, we issued warrants to purchase 300,000
shares of our common stock to Maxicare Health Plans, Inc. Such warrants are
exercisable at any time at $13.50 per share and expire on September 12, 2005.
We did not employ any underwriters, brokers or finders in connection
with either of the transactions set forth above. The sales of the securities
listed above were deemed to be exempt from registration under the Securities Act
in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated
thereunder, as transactions by an issuer not involving a public offering. The
recipients of securities in such transactions represented their intentions to
acquire the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the instruments representing such securities issued in such transactions. All
recipients had adequate access to information about us through our SEC filings
and their relationships with us.
USE OF PROCEEDS. On October 7, 1999, we effected a registration
statement with the SEC on Form S-1, as amended, Registration No. 333-84533,
whereby we registered shares of our common stock raising net proceeds of $36.0
million. As of September 30, 2000, we have used a total of approximately $29.7
million of the net proceeds from our initial public offering, of which
approximately $9.0 million was used for working capital and other general
corporate purposes, approximately $5.9 million was used to pay down debt,
approximately $6.0 million was used for the purchase of property and equipment,
approximately $1.2 million was used for acquisition costs related to Erisco, and
approximately $7.6 million was used to acquire new businesses.
LIMITATIONS ON PAYMENTS OF DIVIDENDS. Our current credit facilities
prohibit us from paying cash dividends without our lender's prior consent.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 27, 2000, we held a special meeting of stockholders to
vote on certain matters relating to our proposed acquisition of all of the
issued and outstanding capital stock of Erisco Managed Care Technologies, Inc.
Of the 21,456,744 shares of common stock issued and outstanding and entitled to
vote at the meeting, there were present at the meeting, in person or by proxy,
the holders of 18,779,467 common shares, representing 87.52% of the total number
of shares entitled to vote at the meeting. This percentage represented a quorum.
The following two proposals were presented and voted on at the special meeting
of stockholders:
Proposal One: Approval of the issuance of shares of our common stock to
IMS Health Incorporated in connection with the merger of our wholly owned
subsidiary, Elbejay Acquisition Corp., with and into Erisco, a wholly-owned
subsidiary of IMS. The voting results were: For 16,445,442; Against 7,238;
Abstain 1,975; Broker Non-Votes 2,324,812.
Proposal Two: Approval of an amendment to our Amended and Restated
Certificate of Incorporation to increase the number of shares of our capital
stock authorized for issuance from 45,000,000 to 100,000,000 consisting of
5,000,000 shares of undesignated preferred stock and 95,000,000 shares of common
stock. The voting results were: For 18,404,534; Against 373,183; Abstain 1,750;
Broker Non-Votes 0. Our Certificate of Amendment to Amended and Restated
Certificate of Incorporation was filed with the Delaware Secretary of State on
October 3, 2000 effecting such amendment.
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ITEM 5. OTHER INFORMATION
On October 2, 2000, we acquired all of the issued and outstanding
capital stock of Erisco in accordance with the terms and conditions of the
Agreement and Plan of Reorganization, dated as of May 16, 2000 (the "Merger
Agreement"), by and among TriZetto, Elbejay, IMS, and Erisco. The acquisition
was effected by a merger of Elbejay with and into Erisco, with Erisco surviving
the merger as our wholly owned subsidiary. The Certificate of Merger was filed
with the New York Secretary of State on October 3, 2000. Pursuant to the Merger
Agreement, all of the issued and outstanding shares of Erisco capital stock were
converted into an aggregate of 12,142,857 shares of fully paid and
non-assessable shares of our common stock, $.001 par value per share.
On September 25, 2000, our board of directors adopted a stockholder
rights plan or "poison pill" as a condition to the consummation of our
acquisition of Erisco. We executed a rights agreement on October 2, 2000 with
U.S. Stock Transfer Corporation, our rights agent. The rights agreement provides
for the distribution of rights to existing stockholders that will enable
stockholders to buy newly issued shares of our stock at a substantial discount
in the event that an acquiror acquires 15% or more of our common stock and the
acquisition is not approved by our board of directors. The rights will also
enable stockholders to buy shares of the acquiror at a substantial discount in
the event either we are acquired in a merger or other business combination by
the acquiror or 50% or more of our assets or earning power is sold or
transferred to the acquiror and the occurrence of one of the above triggering
events is not approved by our board of directors. Shares of our common stock
issued to IMS in connection with the merger and held by IMS, its affiliates and
transferees are excluded from triggering the rights under the rights agreement.
The purpose of the rights agreement is to encourage potential acquirors to
negotiate with our board of directors, to enable the board to seek competing
bids and to give the board the ability to resist offers that are, in its
judgment, inadequate or coercive.
Adoption of the rights agreement may 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.
On November 2, 2000, we entered into an Agreement and Plan of Merger by
and among TriZetto, Cidadaw Acquisition Corp., a Delaware corporation and our
wholly owned subsidiary, Resource Information Management Systems, Inc., an
Illinois corporation ("RIMS"), the shareholders of RIMS, Terry L. Kirch and
Thomas H. Heimsoth, pursuant to which Cidadaw will merge with and into RIMS
resulting in RIMS becoming our wholly owned subsidiary. In connection with the
merger, we will issue an aggregate of approximately 2,588,427 shares of our
common stock, $.001 par value per share, which will represent approximately 7.1%
of the outstanding shares of our common stock after the completion of the
merger, based on the number of shares outstanding as of October 31, 2000, and
will pay an aggregate of $3,000,000 in cash, to the shareholders of RIMS. In
addition, we will assume approximately 300,000 options and will issue
approximately 94,354 shares of restricted stock to certain RIMS' employees.
Consummation of the merger is subject to the approval by various third parties
and federal agencies and satisfaction of certain other closing conditions.
18
<PAGE> 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following exhibits are filed as a part of this report:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of TriZetto, dated October 3, 2000.
3.2 Certificate of Designation of Rights, Preferences and Privileges of
Series A Junior Participating Preferred Stock of TriZetto, dated
October 17, 2000.
4.1 Rights Agreement, dated October 2, 2000, between TriZetto and U.S.
Stock Transfer Corporation (Incorporated by reference to Exhibit 2.1
of TriZetto's Form 8-A12G as filed with the SEC on October 19, 2000,
File No. 000-27501).
10.1* Secured Term Note, dated September 11, 2000, payable by TriZetto and
each of TriZetto's subsidiaries to Heller Healthcare Finance, Inc.
10.2* Loan and Security Agreement, dated September 11, 2000, by and among
TriZetto, each of TriZetto's subsidiaries, and Heller Healthcare
Finance, Inc.
10.3 Revolving Credit Note, dated September 11, 2000, payable by TriZetto
and each of TriZetto's subsidiaries to Heller Healthcare Finance, Inc.
10.4 Amendment No. 1 to Loan and Security Agreement, dated October 17,
2000, by and among TriZetto, each of TriZetto's subsidiaries, and
Heller Healthcare Finance, Inc.
10.5 Amended and Restated Revolving Credit Note, dated October 17, 2000,
payable by TriZetto and each of TriZetto's subsidiaries to Heller
Healthcare Finance, Inc.
27.1 Financial Data Schedule
------------
* Certain exhibits to, and schedules delivered in connection with, these
documents have been omitted pursuant to Item 601(b)(2) of Regulation S-K.
TriZetto agrees to supplementally furnish to the SEC a copy of any such
exhibit or schedule upon request.
(b) REPORTS ON FORM 8-K.
We did not file any current reports on Form 8-K during the three months
ended September 30, 2000.
There were no other items to be reported under Part II of this report.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE TRIZETTO GROUP, INC.
Date: November 14, 2000 By: /s/ Michael J. Sunderland
---------------------------------
Michael J. Sunderland
Chief Financial Officer
(Principal Financial Officer
and Duly Authorized Officer)
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of TriZetto, dated October 3, 2000.
3.2 Certificate of Designation of Rights, Preferences and Privileges of
Series A Junior Participating Preferred Stock of TriZetto, dated
October 17, 2000.
4.1 Rights Agreement, dated October 2, 2000, between TriZetto and U.S.
Stock Transfer Corporation (Incorporated by reference to Exhibit 2.1
of TriZetto's Form 8-A12G as filed with the SEC on October 19, 2000,
File No. 000-27501).
10.1* Secured Term Note, dated September 11, 2000, payable by TriZetto and
each of TriZetto's subsidiaries to Heller Healthcare Finance, Inc.
10.2* Loan and Security Agreement, dated September 11, 2000, by and among
TriZetto, each of TriZetto's subsidiaries, and Heller Healthcare
Finance, Inc.
10.3 Revolving Credit Note, dated September 11, 2000, payable by TriZetto
and each of TriZetto's subsidiaries to Heller Healthcare Finance, Inc.
10.4 Amendment No. 1 to Loan and Security Agreement, dated October 17,
2000, by and among TriZetto, each of TriZetto's subsidiaries, and
Heller Healthcare Finance, Inc.
10.5 Amended and Restated Revolving Credit Note, dated October 17, 2000,
payable by TriZetto and each of TriZetto's subsidiaries to Heller
Healthcare Finance, Inc.
27.1 Financial Data Schedule
</TABLE>
------------
* Certain exhibits to, and schedules delivered in connection with, these
documents have been omitted pursuant to Item 601(b)(2) of Regulation S-K.
TriZetto agrees to supplementally furnish to the SEC a copy of any such
exhibit or schedule upon request.
