Annual Reports

 
Quarterly Reports

  • 10-Q (Aug 11, 2008)
  • 10-Q (May 9, 2008)
  • 10-Q (Nov 2, 2007)
  • 10-Q (Aug 8, 2007)
  • 10-Q (May 8, 2007)
  • 10-Q (Nov 6, 2006)

 
8-K

 
Other

TriZetto Group 10-Q 2008

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-10.2
  4. Ex-31.1
  5. Ex-31.2
  6. Ex-32.1
  7. Ex-32.1
Form 10-Q
Table of Contents

 

 

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 March 31, 2008

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 000-27501

 

 

The TriZetto Group, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   33-0761159

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

 

567 San Nicolas Drive, Suite 360

Newport Beach, California

  92660
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code: (949) 719-2200

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x            Accelerated filer  ¨            Non-accelerated filer  ¨

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of May 7, 2008 43,067,536 shares, $0.001 par value per share, of the registrant’s common stock were outstanding.

 

 

 


Table of Contents

THE TRIZETTO GROUP, INC.

QUARTERLY REPORT ON

FORM 10-Q

For the Quarterly Period Ended March 31, 2008

TABLE OF CONTENTS

 

     PAGE
PART I—FINANCIAL INFORMATION   

Item 1 Financial Statements:

  

Condensed Consolidated Balance Sheets as of March 31, 2008 (unaudited) and December 31, 2007

   1

Unaudited Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2008 and 2007

   2

Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2008 and 2007

   3

Notes to Unaudited Condensed Consolidated Financial Statements

   4
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations    13
Item 3 Quantitative and Qualitative Disclosures About Market Risk    23
Item 4 Controls and Procedures    23
PART II—OTHER INFORMATION   

Item 1 Legal Proceedings

   24

Item 1A Risk Factors

   24

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

   34

Item 6 Exhibits

   35

SIGNATURES

   36


Table of Contents

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

The TriZetto Group, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 

     March 31,
2008
    December 31,
2007
 
     (unaudited)        

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 162,239     $ 208,507  

Accounts receivable, less allowances of $1,756 and $3,528 at March 31, 2008 and December 31, 2007, respectively

     104,200       92,118  

Prepaid expenses and other current assets

     19,708       17,458  

Deferred tax assets

     10,273       10,273  
                

Total current assets

     296,420       328,356  

Property and equipment, net

     31,832       32,889  

Capitalized software development costs, net

     25,340       25,903  

Long-term investments

     68,925       —    

Goodwill

     200,219       200,219  

Other intangible assets, net

     71,741       74,545  

Other assets

     15,392       16,070  
                

Total assets

   $ 709,869     $ 677,982  
                

Liabilities and Stockholders’ Equity

    

Current liabilities:

    

Current portion of notes payable

   $ 395     $ 53  

Current portion of term loan

     10,714       10,714  

Current portion of capital lease obligations

     917       1,108  

Accounts payable

     12,891       16,142  

Accrued liabilities

     30,865       53,079  

Deferred revenue

     94,449       41,356  
                

Total current liabilities

     150,231       122,452  

Long-term convertible debt

     330,000       330,000  

Long-term revolving line of credit and term loan

     56,250       60,250  

Other long-term liabilities

     7,268       6,370  

Capital lease obligations

     1,036       1,172  

Deferred tax liabilities

     2,817       2,817  

Deferred revenue, non-current

     5,107       7,265  
                

Total liabilities

     552,709       530,326  
                

Commitments and contingencies

    

Stockholders’ equity:

    

Common stock

     44       44  

Accumulated other comprehensive income

     (3,375 )     —    

Additional paid-in capital

     371,108       362,151  

Accumulated deficit

     (210,617 )     (214,539 )
                

Total stockholders’ equity

     157,160       147,656  
                

Total liabilities and stockholders’ equity

   $ 709,869     $ 677,982  
                

See accompanying notes.

 

1


Table of Contents

The TriZetto Group, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

(unaudited)

 

     Three Months Ended
March 31,
 
     2008     2007  

Revenue:

    

Services and other

   $ 90,047     $ 89,775  

Products

     16,773       23,728  
                

Total revenue

     106,820       113,503  
                

Operating costs and expenses:

    

Cost of revenue – services and other

     47,874       49,599  

Cost of revenue – products (excludes amortization of acquired technology)

     4,618       5,203  

Research and development

     15,095       15,735  

Selling, general and administrative

     28,790       27,808  

Amortization of acquired technology

     1,421       1,710  

Amortization of acquired other intangible assets

     1,383       1,301  
                

Total operating costs and expenses

     99,181       101,356  

Income from operations

     7,639       12,147  

Interest income

     2,165       753  

Interest expense

     (3,268 )     (2,641 )
                

Income before provision for income taxes

     6,536       10,259  

Provision for income taxes

     (2,614 )     (4,363 )
                

Net income

   $ 3,922     $ 5,896  
                

Net income per share:

    

Basic

   $ 0.09     $ 0.13  
                

Diluted

   $ 0.08     $ 0.12  
                

Shares used in computing net income per share:

    

Basic

     42,321       43,856  
                

Diluted

     60,227       47,825  
                

See accompanying notes.

 

2


Table of Contents

The TriZetto Group, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Three Months Ended
March 31,
 
     2008     2007  

Cash flows from operating activities:

    

Net income

   $ 3,922     $ 5,896  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Net reduction in doubtful accounts and sales allowance

     (939 )     (2,126 )

Stock-based compensation

     2,589       2,912  

Depreciation and amortization

     5,753       5,732  

Amortization of acquired technology

     1,421       1,710  

Amortization of acquired other intangible assets

     1,383       1,301  

Excess tax benefits from stock-based compensation

     (4,636 )     —    

Increase in cash surrender value of life insurance policies

     (302 )     (424 )

Changes in assets and liabilities, net of acquisitions:

    

Accounts receivable

     (11,143 )     (7,010 )

Prepaid expenses and other current assets

     2       (2,127 )

Other assets

     3,364       890  

Accounts payable

     (3,251 )     (4,370 )

Accrued liabilities

     (11,694 )     (13,732 )

Deferred revenue

     50,935       35,913  
                

Net cash provided by operating activities

     37,404       24,565  
                

Cash flows from investing activities:

    

Purchase of investments

     (77,200 )     (8,650 )

Sale of investments

     4,900       8,650  

Purchase of property and equipment and software licenses

     (2,354 )     (4,510 )

Capitalization of software development costs

     (1,779 )     (1,700 )

Acquisitions, net of cash acquired

     (9,622 )     (142,640 )
                

Net cash used in investing activities

     (86,055 )     (148,850 )
                

Cash flows from financing activities:

    

Proceeds from revolving line of credit

     —         87,200  

Proceeds from term note

     —         75,000  

Proceeds from debt financing

     495       —    

Payments on revolving line of credit

     (4,000 )     (84,200 )

Payments on notes payable

     (153 )     (964 )

Payments on capital leases

     (327 )     (519 )

Excess tax benefits from stock-based compensation

     4,636       —    

Employee exercises of stock options

     3,416       7,525  

Repurchase of common stock to treasury

     (1,684 )     —    
                

Net cash provided by financing activities

     2,383       84,042  
                

Net decrease in cash and cash equivalents

     (46,268 )     (40,243 )

Cash and cash equivalents at beginning of period

     208,507       107,057  
                

Cash and cash equivalents at end of period

   $ 162,239     $ 66,814  
                

See accompanying notes.

 

3


Table of Contents

The TriZetto Group, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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, 2007, and pursuant to the instructions to Form 10-Q and Article 10 promulgated by Regulation S-X of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and notes to financial statements required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2008, are not necessarily indicative of the results that may be expected for the year ending December 31, 2008, or for any future period. The financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K as filed with the SEC on February 15, 2008.

2. Computation of Earnings per Share

The computation of basic earnings per share (“EPS”) is based on the weighted average number of common shares outstanding during each period. The computation of diluted EPS is based on the weighted average number of common shares outstanding during the period plus, when their effect is dilutive, incremental shares consisting of shares subject to stock options, warrants and shares issuable upon vesting of restricted stock awards, calculated using the treasury stock method, and shares to be issued upon conversion of convertible debt.

Emerging Issues Task Force No. 04-08, “The Effect of Contingently Convertible Instruments on Diluted Earnings per Share,” requires companies to account for contingently convertible debt using the “if converted” method set forth in Statement of Financial Accounting Standards No. 128, “Earnings per Share,” for calculating diluted EPS. Under the “if converted” method, the after-tax effect of interest expense related to the convertible securities is added back to net income and convertible debt is assumed to have been converted to equity at the beginning of the period, or at such time when the convertible debt became outstanding if issued during the period, and is added to outstanding common shares, unless the inclusion of such shares is anti-dilutive.

For the quarters ended March 31, 2008 and 2007, approximately 2.2 million and 1.8 million options, respectively, were anti-dilutive and excluded from the table below. For the quarter ended March 31, 2008, approximately 10.4 million warrants, relating to the convertible debt offering that occurred on April 11, 2007, were anti-dilutive and excluded from the table below. The following is a reconciliation of the computations of basic and diluted EPS information for the periods presented (in thousands, except per share data):

 

     Three Months Ended
March 31,
     2008    2007

Numerator:

     

Net income, as reported

   $ 3,922    $ 5,896

After-tax interest expense on 2.75% convertible debt

     412      —  

After-tax interest expense on 1.125% convertible debt

     388      —  
             

Net income for diluted EPS calculation

   $ 4,722    $ 5,896
             

Denominator:

     

Weighted average shares outstanding - basic

     42,321      43,856

2.75% convertible debt converted to common shares

     5,305      —  

1.125% convertible debt converted to common shares

     10,467      —  

Unvested common shares outstanding

     160      721

Stock options

     1,974      3,248
             

Adjusted weighted average shares for diluted EPS

     60,227      47,825
             

Basic earnings per share

   $ 0.09    $ 0.13
             

Diluted earnings per share

   $ 0.08    $ 0.12
             

 

4


Table of Contents

3. Comprehensive Income

FASB Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” (“SFAS 130”), establishes standards for reporting and displaying comprehensive income and its components for general-purpose financial statements. Comprehensive income is defined in SFAS 130 as net income plus all revenues, expenses, gains and losses from non-owner sources that are excluded from net income in accordance with U.S. generally accepted accounting principles.

The components of comprehensive income as of March 31, 2008 are as follows (in thousands):

 

Net income

   $ 3,922  

Unrealized loss on non-current auction rate securities

     (3,375 )
        

Total comprehensive income

   $ 547  
        

4. Share-Based Awards

The Company recognizes compensation expense for all share-based awards made to its employees and directors. The fair value of stock options is estimated at the grant date using the Black-Scholes option-pricing model. The fair value of restricted stock awards is based on the closing market price of the Company’s common stock on the date of grant. Stock-based compensation expense for time vested options and awards ultimately expected to vest is recognized as compensation cost over the requisite service period using the straight-line single option method. The Company recognizes compensation cost for performance based restricted stock in the period when it is probable that the performance measures will be achieved. The following table is a summary of the amount of stock-based compensation expense recognized in the consolidated statement of operations (in thousands):

 

     Three Months Ended
March 31,
     2008    2007

Cost of revenue – services and other

   $ 236    $ 654

Cost of revenue – products

     49      45

Research and development

     302      376

Selling, general and administrative

     2,002      1,837
             

Total stock based compensation expense before tax

   $ 2,589    $ 2,912
             

The determination of fair value using the Black-Scholes option-pricing model is affected by various assumptions including the Company’s stock price, expected stock price volatility, risk-free interest rate, expected dividends and projected employee stock option exercise behavior, or expected term. The Company evaluates the assumptions used to value stock awards on a quarterly basis. The following weighted average assumptions were used for the periods presented:

 

     Three Months Ended
March 31,
 
     2008     2007  

Expected volatility

     39 %     45 %

Risk-free interest rate

     2.42 %     4.75 %

Expected term

     3.71 years       6.25 years  

Forfeiture rate

     6 %     6 %

Expected dividends

     0 %     0 %

Weighted average fair value

   $ 6.24     $ 10.11  

Expected volatility is based on a combination of implied volatility from traded options on the Company’s stock and historical volatility of the Company’s stock. The risk-free interest rate is the U.S. Treasury rate on the date of grant having a term equal to the expected life of the option. The Company has not made any dividend payments nor does it have plans to pay dividends in the foreseeable future. In the first quarter of 2008, the Company changed the contractual life of new options granted from 10 to five years. As a result, the Company has determined that comparable historical data does not exist and thus, has continued to apply the “simplified method” outlined in Staff Accounting Bulletin No. 107 to calculate expected term. The forfeiture rate is the estimated percentage of options granted that are expected to be forfeited or cancelled before becoming fully vested and is based on historical experience. These estimates will be revised, if necessary, in future periods if actual forfeitures differ from the estimates. Changes in forfeiture estimates impact compensation cost in the period in which the change in estimate occurs.

 

5


Table of Contents

The following is a summary of stock option activity for the three months ended March 31, 2008 (in thousands, except weighted average data):

 

     Number of
Shares
    Weighted
Average
Exercise Price
   Weighted Average
Remaining
Contractual Life
   Aggregate
Intrinsic Value

Options Outstanding at December 31, 2007

   6,953     $ 11.56      

Granted

   1,082       19.19      

Exercised

   (415 )     8.72      

Cancelled

   (41 )     16.34      
              

Options Outstanding at March 31, 2008

   7,579     $ 12.78    5.37    $ 37,939
              

Exercisable at March 31, 2008

   4,796     $ 10.90    4.84    $ 31,855

The total intrinsic value of options exercised during the three months ended March 31, 2008 was $4.6 million. As of March 31, 2008, $14.9 million of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted average period of 2.98 years.

The following table summarizes nonvested restricted stock awards as of March 31, 2008 and changes during the three months ended March 31, 2008 (in thousands, except weighted average data):

 

     Number of
Shares
    Weighted-
Average
Grant-Date

Fair Value

Nonvested at December 31, 2007

   636     $ 17.29

Granted

   —         —  

Vested

   (67 )   $ 18.52

Forfeited

   (21 )   $ 15.98
        

Nonvested at March 31, 2008

   548     $ 17.19
        

As of March 31, 2008, there was $6.3 million of total unrecognized compensation cost related to nonvested restricted stock awards, which will be amortized over the weighted-average remaining service period of 1.61 years.

5. Supplemental Cash Flow Disclosures

The following table is a summary of supplemental cash flow disclosures as follows (in thousands):

 

     Three Months Ended
March 31,
     2008    2007

SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION

     

Cash paid for interest

   $ 2,907    $ 919

Cash paid for income taxes

     627      2,776

NON-CASH INVESTING AND FINANCING ACTIVITIES

     

Assets acquired through capital lease

     —        349

Common stock issued in connection with PDM acquisition

     —        8,000

 

6


Table of Contents

6. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

 

     March 31,
2008
   December 31,
2007

Accrued payroll and benefits

   $ 18,149    $ 34,181

Accrued professional and litigation fees and settlements

     767      1,342

Accrued contingent considerations

     —        9,772

Accrued employee relations

     464      388

Accrued income and other taxes

     2,841      1,964

Accrued interest

     2,636      1,335

Other

     6,008      4,097
             
   $ 30,865    $ 53,079
             

The Company accrues expense related to the bonus program in the year of performance and pays the bonus in the first quarter following the fiscal year end. The Company met the financial objectives for fiscal year 2007 and paid bonus to its employees in the amount of $19.6 million in March 2008, contributing to the reduction in accrued payroll and benefits in the first quarter of 2008. The contingent considerations earned by former QCSI stockholders, warrantholders and optionholders as of December 31, 2007 were paid in January 2008.

7. Debt

Debt consists of the following for the periods presented (in thousands):

 

     Notes Payable     Line of Credit and
Term Loan
 
     March 31,
2008
    December 31,
2007
    March 31,
2008
    December 31,
2007
 

Long-term convertible debt, due in 2025, interest at 2.75% fixed rate, payable semi-annually in arrears

   $ 100,000     $ 100,000     $ —       $ —    

Long-term convertible debt, due in 2012, interest at 1.125% fixed rate, payable semi-annually in arrears

     230,000       230,000       —         —    

Term loan of $150.0 million, interest at the lending institution’s prime rate plus adjustable applicable margin between 0.00% and 2.00% (prime rate 5.25% at March 31, 2008), payable monthly in arrears; or LIBOR rate plus an adjustable applicable margin of between 1.75% and 3.50%, payable upon maturity date

     —         —         66,964       66,964  

Revolving credit facility of $100.0 million, interest at the lending institution’s prime rate plus adjustable applicable margin between 0.00% and 2.00% (prime rate 5.25% at March 31, 2008), payable monthly in arrears; or LIBOR rate plus an adjustable applicable margin of between 1.75% and 3.50%, payable upon maturity date

     —         —         —         4,000  

Other

     395       53       —         —    
                                

Total debt

   $ 330,395     $ 330,053     $ 66,964     $ 70,964  

Less: Current portion

     (395 )     (53 )     (10,714 )     (10,714 )
                                
   $ 330,000     $ 330,000     $ 56,250     $ 60,250  
                                

2.75% Convertible Senior Notes

In October 2005, the Company issued $100.0 million aggregate principal amount of 2.75% Convertible Senior Notes due 2025 (the “2025 Notes”). The 2025 Notes bear interest at a rate of 2.75%, which is payable in cash semi-annually in arrears on April 1 and October 1 of each year, and commenced on April 1, 2006, to the holders of record on the preceding March 15 and September 15, respectively.

 

7


Table of Contents

The 2025 Notes are convertible into shares of the Company’s common stock at an initial conversion price of $18.85 per share, or 53.0504 shares for each $1,000 principal amount of 2025 Notes, subject to certain adjustments pursuant to an indenture with Wells Fargo Bank, National Association, as trustee (the “2025 Indenture”). The maximum conversion rate is 68.9655 shares for each $1,000 principal amount of 2025 Notes. Upon conversion of the 2025 Notes, the Company will have the right to deliver shares of its common stock, cash or a combination of cash and shares of its common stock. The 2025 Notes are convertible (i) prior to October 1, 2020, during any fiscal quarter after the fiscal quarter ending December 31, 2005, if the closing sale price of the Company’s common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter exceeds 120% of the conversion price in effect on the last trading day of the immediately preceding fiscal quarter, (ii) prior to October 1, 2020, during the five business day period after any five consecutive trading day period (the “Note Measurement Period”) in which the average trading price per $1,000 principal amount of 2025 Notes was equal to or less than 97% of the average conversion value of the 2025 Notes during the Note Measurement Period, (iii) upon the occurrence of specified corporate transactions, as described in the 2025 Indenture, (iv) if the Company calls the 2025 Notes for redemption, or (v) any time on or after October 1, 2020.

The 2025 Notes mature on October 1, 2025. However, on or after October 5, 2010, the Company may from time to time at its option redeem the 2025 Notes, in whole or in part, for cash, at a redemption price equal to 100% of the principal amount of the 2025 Notes the Company redeems, plus any accrued and unpaid interest to, but excluding, the redemption date. On each of October 1, 2010, October 1, 2015 and October 1, 2020, holders may require the Company to purchase all or a portion of their 2025 Notes at a purchase price in cash equal to 100% of the principal amount of the 2025 Notes to be purchased, plus any accrued and unpaid interest to, but excluding, the purchase date. In addition, holders may require the Company to repurchase all or a portion of their 2025 Notes upon a fundamental change, as described in the 2025 Indenture, at a repurchase price in cash equal to 100% of the principal amount of the 2025 Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. Additionally, the 2025 Notes may become immediately due and payable upon an Event of Default, as defined in the 2025 Indenture. Pursuant to a Registration Rights Agreement dated October 5, 2005, the Company filed with the Securities and Exchange Commission, a registration statement under the Securities Act for the purpose of registering for resale, the 2025 Notes and all of the shares of its common stock issuable upon conversion of the 2025 Notes.

1.125% Convertible Senior Notes

On April 11, 2007, the Company entered into a Purchase Agreement with Deutsche Bank Securities Inc., Goldman, Sachs & Co. and UBS Investment Bank (the “Initial Purchasers”), to sell $230.0 million aggregate principal amount of its 1.125% Convertible Senior Notes due 2012 which included $30 million to cover over-allotments (the “2012 Notes”) in a private placement in reliance on Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”). The 2012 Notes have been resold by the Initial Purchasers to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The sale of the 2012 Notes to the Initial Purchasers was consummated on April 17, 2007.

The aggregate net proceeds received by the Company from the sale of the 2012 Notes was approximately $223 million, after deducting the Initial Purchasers’ discount and offering expenses. The 2012 Notes are the Company’s senior unsecured obligations and rank equal in right of payment with all of the Company’s other senior unsecured debt and senior to all of the Company’s future subordinated debt.

The 2012 Notes were issued pursuant to an indenture, dated April 17, 2007, by and between the Company and Wells Fargo Bank, National Association, as trustee (the “2012 Indenture”). The 2012 Notes bear interest at a rate of 1.125%, which is payable in cash semi-annually in arrears on April 15 and October 15 of each year, and commenced on October 15, 2007, to the holders of record on the preceding April 1 and October 1, respectively.

The 2012 Notes are convertible into shares of the Company’s Common stock at an initial conversion price of $21.97 per share, or 45.5114 shares for each $1,000 principal amount of 2012 Notes, subject to certain adjustments set forth in the 2012 Indenture. The maximum conversion rate is 53.4759 shares for each $1,000 principal amount of 2012 Notes. Upon conversion of the 2012 Notes, the Company will have the right to deliver shares of its common stock, cash or a combination of cash and shares of its common stock. The 2012 Notes are convertible (i) prior to January 15, 2012, during any calendar quarter after the calendar quarter ending June 30, 2007, if the closing sale price of the Company’s common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter exceeds 130% of the conversion price in effect on the last trading day of the immediately preceding fiscal quarter, (ii) prior to January 15, 2012, during the five business day period after any five consecutive trading day period (the “Note Measurement Period”) in which the average trading price per $1,000 principal amount of 2012 Notes was equal to or less than 97% of the average conversion value of the 2012 Notes during the Note Measurement Period, (iii) upon the occurrence of specified corporate transactions, as described in the 2012 Indenture, or (iv) any time on or after January 15, 2012.

 

8


Table of Contents

The Company used $59.0 million of the aggregate net proceeds from the 2012 Notes to pay the net cost of a call option transaction entered into in connection with the offering. The call option covers approximately 10.4 million shares of the Company’s common stock and is intended to reduce the dilution to the Company’s common stock upon potential future conversion of the 2012 Notes. The call option has an exercise price equal to the conversion price of the 2012 Notes and will terminate on the earlier of (i) the last day any of the 2012 Notes remain outstanding or (ii) April 15, 2012. The Company also entered into a warrant transaction in connection with the offering. The Company sold warrants to acquire approximately 10.4 million shares of the Company’s common stock to affiliates of one or more of the initial purchases for $25.7 million. The warrants have an exercise price of $31.79 per share and may be settled at various dates from July 2012 through December 2012.

Wells Fargo Foothill Amended and Restated Credit Agreement

On January 10, 2007, the Company (together with certain specified subsidiaries, the “Borrowers”) entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with Wells Fargo Foothill, Inc., as the administrative agent and lender (the “Lender”). The Credit Agreement amended and restated the Company’s $100.0 million revolving credit facility with the Lender and provided that the Lender will make available to the Company up to $150.0 million of term debt (the “Term Loan”). The Credit Agreement expires by its terms on January 5, 2011. All borrowings under the Credit Agreement bear interest at a per annum rate equal to either (i) the LIBOR rate plus an adjustable applicable margin of between 1.75% and 3.50% or (ii) Wells Fargo’s prime rate plus an adjustable applicable margin of between 0.0% and 2.0%, at the election of the Company, subject to specified restrictions.

The Company initially drew down $75.0 million from the Term Loan to partially fund its acquisition of Quality Care Solutions, Inc. (“QCSI”) in January 2007. All borrowings under the Term Loan must be repaid in quarterly installments commencing on June 30, 2007 and continuing on the first day of each calendar quarter thereafter through January 5, 2011, in amounts equal to the amount outstanding under the Term Loan on June 30, 2007 with a final balloon payment due January 5, 2011.

On March 31, 2008, the Company entered into Amendments Number Three and Four to the Amended and Restated Credit Agreement dated January 10, 2007 (the “Amendment”), with Wells Fargo Foothill, Inc. Amendment Three sets forth the quarterly trailing twelve month recurring revenue requirements through December 31, 2008. Amendment Four allows the Borrowers to request additional term loan draws through March 31, 2009 and further extends the application of an unused term loan commitment fee through April 1, 2009. In addition, Amendment Four extends the deadline for the Company to repurchase shares of its common stock to March 31, 2009. The guidelines for repurchase still remain in place allowing the Company to repurchase up to $100.0 million of its common stock provided that the Company has liquidity (defined as the sum of unrestricted cash and cash equivalents plus availability of borrowings on its revolving line of credit) in excess of $80.0 million both before and immediately after giving effect to such transaction.

As of March 31, 2008, no additional draws have been made. In the event Borrowers terminate the Credit Agreement prior to its expiration or make certain prepayments, the Borrowers will be required to pay the Lender a termination or prepayment fee equal to 1% of the maximum credit amount in the event of termination or 1% of the prepayment amount in the event of prepayments, subject to specified exceptions. Under the Credit Agreement, the Borrowers have granted the Lender a security interest in all of the assets of the Borrowers.

The Credit Agreement contains customary affirmative and negative covenants for credit facilities of this type, including limitations on the Borrowers with respect to indebtedness, liens, investments, distributions, mergers and acquisitions, dispositions of assets and transactions with affiliates of the Borrowers. The Credit Agreement also includes financial covenants including minimum EBITDA, minimum liquidity, minimum recurring revenue (which includes outsourced business services and software maintenance revenue) and maximum capital expenditures.

As of March 31, 2008, the Company had no outstanding borrowings on the revolving line of credit and $67.0 million outstanding under the Term Loan, and was in compliance with all applicable covenants and other restrictions under the Credit Agreement. As of March 31, 2008, the Company also had $100.0 million available under its revolving line of credit.

8. Legal Proceedings

On April 15, 2008, two complaints were filed against the Company and members of its Board of Directors seeking to enjoin the proposed merger with Apax Partners, L.P. On May 7, 2008, a third complaint was filed against the Company and members of its Board of Directors, also seeking to enjoin the proposed merger with Apax Partners, L.P. All three complaints are discussed further below in the Subsequent Events Note 12.

In addition to the matters described above, the Company is involved in litigation from time to time relating to claims arising out of its operations in the normal course of business. Except as discussed above, as of the filing date of this quarterly report on Form 10-Q, the Company was not a party to any other legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on its results of operations, financial position and/or cash flows.

 

9


Table of Contents

9. Reclassifications

Certain reclassifications, none of which affected net income, have been made to prior year amounts to conform to current year presentation.

10. Fair Value Measurements

In the first quarter of 2008, the Company adopted Statement of Financial Accounting Standards No. 157, “Fair Value Measurements,” (“SFAS No. 157”) for financial assets and liabilities. This standard defines fair value, provides guidance for measuring fair value and requires certain disclosures. This standard does not require any new fair value measurements in the financial statements, but rather applies to all other accounting pronouncements that require or permit fair value measurements.

SFAS No. 157 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The statement utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

 

   

Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

 

   

Level 2: Inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

 

   

Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

Our population of financial assets and liabilities subject to fair value measurements and the necessary disclosures are as follows (in thousands):

 

    

Fair Value

As of

   Fair Value Measurement at March 31, 2008
(Using Fair Value Hierarchy)
     March 31,
2008
   Level 1    Level 2    Level 3

Assets

           

Cash and cash equivalents

   $ 162,239    $ 162,239    $ —      $ —  

Long-term investments

     68,925      —        —        68,925
                           

Sub-total

     231,164      162,239      —        68,925

Long-term debt

     336,376      —        336,376      —  
                           

Total

   $ 567,540    $ 162,239    $ 336,376    $ 68,925
                           

The long-term debt values are based on actual transactions in the Company’s convertible debt instruments. However, given the relatively low number of transactions, the Company used Level 2 measurements to determine the fair value of the Company’s convertible debt instruments as of March 31, 2008 for disclosure purposes. The convertible debt continues to be recorded at carrying value on the Company’s balance sheet.

The long-term investments represent taxable note investments with an auction reset function (“auction rate securities”) collateralized by student loans which are substantially backed by the federal government and state agencies. These instruments were purchased by the Company in January 2008 and classified as available-for-sale. Beginning in February 2008, auctions for the Company’s auction rate securities failed due to conditions in the market. A failed auction results in a lack of liquidity in the securities but does not signify a default by the issuer. Upon an auction failure, the interest rates do not reset at a market rate but instead reset based on a formula contained in the security. As of March 31, 2008, all of the Company’s auction rate securities continue to be rated AAA by Standard & Poor’s or Aaa by Moody’s despite the auction failures.

On March 31, 2008, with the assistance of the Company’s investment advisor, the Company determined the fair value of the auction rate securities no longer approximated their par value based on a discounted cash flow valuation model that was based on the collateralization of the underlying securities, the credit rating of the investment, the timing of expected future cash flows, and the expected duration until the securities trade again. As a result, the Company concluded that the auction rate securities were temporarily impaired and recorded an unrealized loss of approximately $3.4 million to Accumulated Other Comprehensive Income to reflect the revised fair value of the auction rate securities at $68.9 million. Given the uncertainty as to when the market conditions will recover and auctions will resume, the Company has classified the auction rate securities as long-term investments.

 

10


Table of Contents

The Company reviewed the classification of the impairment charges in accordance with Emerging Issues Task Force No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” Staff Accounting Bulletin Topic 5M, “Other-Than-Temporary Impairment of Certain Investments in Debt and Equity Securities,” and FASB Staff Position Nos. 115-1 and 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” A temporary impairment charge results in an unrealized loss being recorded in the accumulated other comprehensive income component of stockholders’ equity. The Company believes this treatment is appropriate because the Company has concluded the loss in value attributable to its auction rate securities is temporary in nature and the Company has both the ability and intent to hold the auction rate securities until a recovery in market value takes place. The Company will continue to monitor and analyze its auction rate securities investments to determine whether the impairment continues to exist, and if so, how the impairment should be classified.

The following table provides a summary of changes the fair value of the Company’s auction rate securities as of March 31, 2008 (in thousands):

 

     Auction Rate
Securities
 

Balance at December 31, 2007

   $ —    

Purchases, transfers and settlements

     72,300  

Unrealized loss included in other comprehensive income

     (3,375 )
        

Balance at March 31, 2008

   $ 68,925  
        

11. Recent Accounting Pronouncements

In December 2007, the FASB issued “Business Combinations,” (“FAS 141R”). FAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination, recognizing assets acquired and liabilities assumed arising from contingencies, and determining what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. FAS 141R is effective for fiscal years beginning after December 15, 2008. The Company expects FAS 141R will have an impact on its consolidated financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions it consummates after the effective date.

In December 2007, the FASB issued “Noncontrolling Interests in Consolidated Financial Statement, (“FAS 160”). FAS 160 amends ARB 51 to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements. Consolidated net income should include the net income for both the parent and the noncontrolling interest with disclosure of both amounts on the consolidated statement income. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. FAS 160 is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating what impact, if any, FAS 160 will have on its consolidated financial statements.

12. Subsequent Events

On April 11, 2008, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with TZ Holdings, L.P., a Delaware limited partnership (“Parent”) and TZ Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Parent (“Merger Sub”). Parent is controlled by Apax Partners, L.P. (“Apax”). BlueCross BlueShield of Tennessee, Inc. (“BCBST”) and Regence BlueCross BlueShield of Oregon, Regence BlueCross BlueShield of Utah and Regence BlueShield (collectively, the “Regence Group”) are providing a portion of the funding for the transaction and will be equity investors in the surviving corporation.

The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company (the “Merger”) with the Company continuing as the surviving corporation and a wholly-owned subsidiary of Parent. As of the effective date of the Merger, each issued and outstanding share of common stock of the Company will be cancelled and converted into the right to receive $22.00 in cash (the “Merger Consideration”). The transaction is valued at approximately $1.4 billion, including consideration for stock options and shares underlying the Company’s convertible notes. Parent and Merger Sub have obtained equity and debt financing commitments for the transactions contemplated by the Merger Agreement, the aggregate proceeds of which will be sufficient for Parent to pay the aggregate Merger Consideration and all related fees and expenses. Consummation of the Merger is subject to various conditions, including adoption of the Merger Agreement by the Company’s stockholders and other customary closing conditions. The Company expects to close the transaction during the second half of 2008.

 

11


Table of Contents

The Merger Agreement contains certain termination rights for both the Company and Parent. The Merger Agreement provides that, upon termination under specified circumstances, the Company would be required to pay Parent a termination fee of $50.0 million. The Merger Agreement further provides that, upon termination under specified circumstances, Parent would be required to pay the Company a reverse termination fee of $65.0 million. The reverse termination fee potentially payable by Parent is guaranteed by BCBST, the Regence Group and certain affiliates of Apax, in separate limited guarantees.

On April 15, 2008, two complaints were filed against the Company and members of its Board of Directors seeking to enjoin the proposed merger with Apax Partners, L.P. In the first case, Plaintiff David P. Simonetti Rollover IRA filed a Verified Class Action Complaint in The Court of Chancery of the State of Delaware, entitled David P. Simonetti Rollover IRA, Individually and On Behalf of All Others Similarly Situated, Plaintiff, v. Jeffrey H. Margolis, Donald J. Lothrop, Thomas B. Johnson, Paul F. Lefort, Jerry P. Widman, Nancy H. Handel, L. William Krause, Apax Partners, L.P., TZ Holdings, L.P., TZ Merger Sub, Inc., and The TriZetto Group Inc., Defendants, Case No. 3694. The complaint seeks certification of a class of all common stockholders of TriZetto who are allegedly harmed by the defendants’ actions challenged in the complaint, a declaration that the defendants have breached their fiduciary and other duties, entry of an order requiring defendants to take certain steps in connection with the proposed transaction, compensatory damages, costs and disbursements, including plaintiff’s counsel’s fees and experts’ fees, and other relief.

In the second case, Plaintiff City of Fort Lauderdale Police and Firefighters’ Retirement System filed a Complaint Based Upon Self-Dealing and Breach of Fiduciary Duty in the Superior Court of the State of California, County of Orange, entitled City of Fort Lauderdale Police and Firefighters’ Retirement System, on Behalf of Itself and All Others Similarly Situated, Plaintiff, v. Jeffrey H. Margolis, Paul F. Lefort, Nancy H. Handel, Thomas N. Johnson, L. William Krause, Donald J. Lothrop, Jerry P. Widman, The TriZetto Group, Inc., and Apax Partners, Defendants, Case No. 30-2008-00061215. The complaint seeks certification of a class of all holders of TriZetto’s stock who are allegedly harmed by the defendants’ actions challenged in the complaint, a declaration that the Agreement and Plan of Merger was entered into in breach of defendants’ fiduciary duties and is therefore unlawful and unenforceable, injunctive relief enjoining defendants and others from consummating the proposed transaction, rescission, a constructive trust, and costs and disbursements, including attorneys’ and experts’ fees, among other requested relief.

On May 7, 2008, a third complaint was filed against the Company and members of our Board of Directors seeking to enjoin the proposed merger. In the third case, Plaintiff Police and Fire Retirement System of the City of Detroit filed a Complaint Based Upon Self-Dealing and Breach of Fiduciary Duties in the Superior Court of the State of California, County of Orange, entitled Police and Fire Retirement System of the City of Detroit, on Behalf of Itself and All Others Similarly Situated, Plaintiff, v. The TriZetto Group Inc., Jeffrey H. Margolis, Donald L. Lothrop, Thomas B. Johnson, Paul F. Lefort, Jerry P. Widman, Nancy H. Handel, L. William Krause, Apax Partners, L.P., TZ Holdings, L.P., and TZ Merger Sub, Inc., Defendants, Case No. 30-2008-00180024. The complaint seeks certification of a class of all holders of TriZetto’s stock who are allegedly harmed by the defendants’ actions challenged in the complaint, a declaration that the Agreement and Plan of Merger was entered into in breach of defendants’ fiduciary duties, injunctive relief enjoining defendants from disenfranchising the proposed class and consummating the proposed transaction, and costs and disbursements, including attorneys’ fees, among other requested relief.

 

12


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

We offer a broad portfolio of proprietary information technology products and services targeted to the payer industry, which is comprised of health insurance plans and third party benefits administrators. We offer core administration software, including Facets Extended Enterprise™, QicLink Extended Enterprise™, QNXT™, enterprise cost and quality of care software, including Clinical CareAdvance™ and Personal CareAdvance™, and our NetworX™ suite for provider network management. The Company also provides a number of component software solutions and add-ons to the enterprise software solutions, including CDH Account Management, Workflow, Constituent Web Solution® and Benefit Cost Modeler. In addition, in connection with the recent acquisition of PDM, we provide business solutions for Medicare Advantage, Detection and Recovery Services and Healthcare Informatics. To support these software products, the Company provides software hosting services and business process outsourcing services, giving customers variable cost alternatives to licensing software, as well as strategic, implementation and optimization consulting services. As of March 31, 2008, we served 354 unique customers in the health plan and benefits administrator markets, which we collectively refer to as payers. In the first quarter of 2008, these markets represented 93% and 7% of our total revenue, respectively.

We measure financial performance by monitoring revenue, bookings and backlog, and net income. Total revenue in the first quarter of 2008 was $106.8 million compared to $113.5 million for the same period in 2007. Services and other revenue in the first quarter of 2008 was $90.0 million compared to $89.8 million for the same period in 2007. Products revenue in the first quarter of 2008 was $16.8 million compared to $23.7 million for the same period in 2007. Bookings in the first quarter of 2008 were $236.4 million compared to $99.9 million for the same period in 2007. Backlog at March 31, 2008 was $1.1 billion compared to $964.8 million at March 31, 2007. Net income in the first quarter of 2008 was $3.9 million compared to $5.9 million for the same period in 2007. These financial comparisons are further explained in the section below, “Results of Operations.”

We generate services revenue from several sources, including the provision of outsourcing services, such as software hosting and business process outsourcing services, the sale of maintenance and support for our proprietary and certain of our non-proprietary software products, and from consulting fees for implementation, installation, configuration, business process engineering, data conversion, testing and training related to the use of our proprietary, and third-party licensed products. We generate products revenue from the licensing of our software. Cost of revenue includes costs related to the products and services we provide to our customers and costs associated with the operation and maintenance of our customer connectivity centers. These costs include salaries and related expenses for consulting personnel, customer connectivity centers’ personnel, customer support personnel, application software license fees, amortization of capitalized software development costs, telecommunications costs, facility costs, and maintenance costs. Research and development (“R&D”) expenses are salaries and related expenses associated with the development of software applications prior to establishing technological feasibility. Such expenses include compensation paid to software engineering personnel and other administrative, infrastructure and facility expenses and fees to outside contractors and consultants. Selling, general and administrative expenses consist primarily of salaries and related expenses for sales, sales commissions, account management, marketing, administrative, finance, legal, human resources and executive personnel, and fees for certain professional services.

As part of our growth strategy, we intend to increase revenue per customer by continuing to introduce new complementary products and services, including new cost and quality of care products and services, to our established enterprise software and hosting and business process outsourcing services. Some of these service offerings, including hosting, business process outsourcing, and consulting have a higher cost of revenue, resulting in lower gross profit margins. Therefore, to the extent that our revenue increases through the sale of these lower margin product and service offerings, our total gross profit margin may decrease.

We are continuing to target larger health plan customers. This has given us the opportunity to sell additional services such as software hosting, business intelligence, and business process outsourcing services. As the technology requirements of our customers become more sophisticated, our service offerings have become more complex. This has lengthened our sales cycles and made it more difficult for us to predict the quarterly timing of our software and services sales.

In May 2007, we made a decision to sunset our FACTS™ proprietary software product. A formal plan of restructuring was developed and includes four milestones to complete the final coding and release of FACTS™ 7.0. The final milestone to end sales and support of the FACTS™ software product is approximately March 31, 2009. However, we intend to convert as many of our existing FACTS™ customers as possible to our Facets®, QNXTor QicLink™ software platforms. The plan of restructuring includes the elimination of positions within the research and development group, which was formally communicated to all affected employees late in the second quarter of 2007. To retain key employees and to ensure that the final product milestones are achieved, benefit packages were provided and are contingent upon completion of these milestones. We currently estimate that the total amount of severance expense and retention bonuses to be accrued through the final milestone date on March 31, 2009 is approximately $1.0 million. As of March 31, 2008, we have accrued $582,000 related to severance expense and retention bonuses, which are reflected in cost of revenue – services and other and research and development in the consolidated statement of income. To date, $29,000 of these costs have been paid or otherwise settled.

 

13


Table of Contents

Effective August 2007, we agreed to sell and transfer full ownership rights of the InAlysis Personal Analyst Suite of business intelligence software (referred to as the “Decipher” product), which we acquired in early 2003. The Decipher software was sold for approximately $1.0 million with payment terms of four equal installments through December 31, 2010. The first installment payment was received and recognized as income in the consolidated statement of income in the first quarter of 2008. The remaining $750,000 will be recorded as income in the periods cash payments are received.

In December 2007, our management and administrative services agreement with QualChoice of Arkansas, Inc. and QCA Health Plan (“QCA”) expired. However, effective January 2008, we have entered into a seven-year hosting services agreement with QCA. Revenue from the QCA management and administrative services agreement was $15.9 million in 2006 and $10.0 million in 2007.

In February 2008, we granted cash-based performance units in lieu of restricted stock awards. These performance units are aligned with our multi-year strategic revenue targets. The expense for the performance units may be adjusted each period based on the current quarter contribution towards those multi-year revenue targets and the overall likelihood of payment, and therefore, may fluctuate dramatically from period to period. In the first quarter of 2008, approximately $780,000 of expense related to performance units was recognized in the consolidated statement of income.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Those estimates are based on our experience, terms of existing contracts, observance of trends in the industry, information provided by our customers and information available from other outside sources, which are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

The following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements, and may potentially result in materially different results under different assumptions and conditions. We have identified the following as critical accounting policies to our company:

 

   

Revenue recognition;

 

   

Up-front payments to customers;

 

   

Sales returns and allowance for doubtful accounts;

 

   

Capitalization of software development costs;

 

   

Goodwill and other intangible assets;

 

   

Litigation accruals;

 

   

Self-insurance;

 

   

Bonus accrual;

 

   

Income taxes; and

 

   

Share-based awards.

This listing is not a comprehensive list of all of our accounting policies. For a detailed discussion on the application of these and other accounting policies, see Note 2 of Notes to Consolidated Financial Statements in our annual Form 10-K filed with the Securities and Exchange Commission on February 15, 2008.

Revenue Recognition. We recognize revenue when persuasive evidence of an arrangement exists, the product or service has been delivered, fees are fixed or determinable, collection is reasonably assured and all other significant obligations have been fulfilled. Our revenue is classified into two categories: services and other, and products. For the quarter ended March 31, 2008, approximately 84% of our total revenue was generated from services and other revenue and 16% was from products revenue.

 

14


Table of Contents

We follow the provisions of the Securities and Exchange Commission Staff Accounting Bulletin No. 104, “Revenue Recognition,” AICPA Statement of Position 97-2, “Software Revenue Recognition,” as amended (“SOP 97-2”), Emerging Issues Task Force No. 00-3, “Application of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entity’s Hardware,” (“EITF 00-3”), and Emerging Issues Task Force No. 00-21, “Revenue Arrangements with Multiple Deliverable” (“EITF 00-21”).

We generate services and other revenue from several sources, including the provision of outsourcing services, such as software hosting and other business services, and the sale of maintenance and support for our proprietary software products. We apply EITF 00-3 to hosting arrangements that include the licensing of software. A software element covered by SOP 97-2 is present in a hosting arrangement if the customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty and it is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software. Outsourcing services revenue is typically billed and recognized monthly over the contract term, generally three to seven years. Many of our outsourcing agreements require us to maintain a certain level of operating performance. We record revenue net of estimated penalties resulting from any failure to maintain this level of operating performance. These penalties have not been significant in the past. Software maintenance and support revenues are typically based on one-year renewable contracts and are recognized ratably over the contract period. Software maintenance in which we receive payment in advance is recorded on the balance sheet as deferred revenue.

We also generate services and other revenue from consulting fees for implementation, installation, configuration, business process engineering, data conversion, testing and training related to the use of our proprietary and third party licensed products. In certain instances, we also generate services revenue from customization services of our proprietary licensed products. We recognize revenue for these services as they are performed. We also generate services revenues associated with preparing our customer connectivity center or a customer’s data center in order to ready a specific customer for software hosting services. These fees are usually separate and distinct from the hosting fees, and performance of the set-up services represents the culmination of the earnings process. We recognize revenue for these services as they are performed. We generate other revenue from certain one-time charges, including certain contractual fees such as termination fees and change of control fees, and we recognize the revenue for these fees once the termination or change of control is guaranteed, there are no remaining substantive performance obligations and collection is reasonably assured. Other revenue is also generated from fees related to our product-related customer conferences, which is recognized as our obligations are performed.

For multiple element arrangements, such as software license, consulting services, outsourcing services and maintenance, and where vendor-specific objective evidence (“VSOE”) of fair value exists for all undelivered elements, we account for the delivered elements in accordance with the “residual method” of SOP 97-2 or EITF 00-21, as applicable. VSOE of fair value is determined for each undelivered element based on how it is sold separately, or in the case of maintenance, the renewal rate. For arrangements in which VSOE of fair value does not exist for each undelivered element, including specified product and upgrade rights, revenue for the delivered element is deferred and not recognized until VSOE of fair value is available for the undelivered element or delivery of each element has occurred, unless the only undelivered element is a service in which revenue from the delivered element is recognized over the service period. In determine VSOE for the undelivered elements, no portion of the discount is allocated to specified or unspecified product or upgrade rights.

Under the residual method, the arrangement fee is recognized as follows: (1) the total fair value of the undelivered elements, as indicated by VSOE of fair value, is deferred and subsequently recognized in accordance with the relevant sections of SOP 97-2 and (2) the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements.

We generate products revenue from the licensing of our software. Under SOP 97-2, software license revenue is recognized upon the execution of a license agreement, upon delivery of the software, when fees are fixed or determinable, when collectibility is probable and when all other significant obligations have been fulfilled. For software license agreements in which customer acceptance is a significant condition of earning the license fees, revenue is not recognized until acceptance occurs. For software license agreements that require significant customization or modification of the software, revenue for the software is recognized on a percentage-of-completion basis as the customization services are performed. Progress to completion under the percentage-of-completion method is generally determined based upon direct labor costs. For software license arrangements that include a right to use the product for a defined period of time or for content subscriptions, revenue is generally recognized ratably over the term of the license.

Up-front Payments to Customers. We may pay certain up-front amounts to our customers in connection with the establishment of our hosting and outsourcing services contracts. Under Emerging Issues Task Force No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products),” these payments are

 

15


Table of Contents

capitalized and amortized over the life of the contract as a reduction to revenue, provided that such amounts are recoverable from future revenue under the contract. If an up-front payment is not recoverable from future revenue or contract cancellation penalties paid by the customer, the amount will be expensed in the period it is deemed unrecoverable. Unamortized up-front fees were $4.4 million and $5.8 million as of March 31, 2008 and 2007, respectively.

Sales Returns and Allowance for Doubtful Accounts. We maintain a reserve for estimated discounts, pricing adjustments, and other sales allowances. The reserve is charged to revenue in amounts sufficient to maintain the allowance at a level we believe is adequate based on historical experience and current trends. We also maintain an allowance for doubtful accounts to reflect estimated losses resulting from the inability of customers to make required payments. We base this allowance on estimates after consideration of factors such as the composition of the accounts receivable aging and bad debt history and our evaluation of the financial condition of the customers. If the financial condition of customers were to deteriorate, resulting in an impairment of their ability to make payments, additional bad debt expense may be required. We typically do not require collateral. Historically, our estimates for sales allowances and doubtful account reserves have been adequate to cover accounts receivable exposures. We continually monitor these reserves and make adjustments to these provisions when we believe actual credits or other allowances may differ from established reserves.

Capitalization of Software Development Costs. The capitalization of software costs includes developed technology acquired in acquisitions and costs incurred by us in developing our products that qualify for capitalization. We account for our software development costs, other than costs for internal-use software, in accordance with Statement of Financial Accounting Standards, “Accounting for Costs of Computer Software to be Sold, Leased or Otherwise Marketed.” We capitalize costs associated with product development, coding and testing subsequent to establishing technological feasibility of the product. Technological feasibility is established after completion of a detailed program design or, in its absence, a working model. Capitalization of computer software costs ceases upon a product’s general availability release. Amounts capitalized as software development costs are amortized using the greater of revenues during the period compared to the total estimated revenues to be earned or on a straight-line basis over estimated lives, which is generally deemed to be five years. In some instances, the period between achieving technological feasibility and the general availability of such software is short and software development costs qualifying for capitalization is insignificant. As a result, no costs are capitalized and such costs are expensed in the period incurred.

On a quarterly basis, we monitor the expected net realizable value of the capitalized software for factors that would indicate impairment, such as a decline in the demand, the introduction of new technology, or the loss of a significant customer. As of March 31, 2008, our evaluation determined that the carrying amount of these assets was not impaired.

Goodwill and Other Intangible Assets. Acquisitions are accounted for using the purchase method of accounting. The purchase price is allocated to the tangible and intangible assets acquired and the 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 is allocated to goodwill and other intangible assets.

Under Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” goodwill and intangible assets deemed to have indefinite lives are subject to annual (or more often if indicators of impairment exist) impairment tests using a two-step process. The first step looks for indicators of impairment. If indicators of impairment are revealed in the first step, then the second step is conducted to measure the amount of the impairment, if any. We performed our annual impairment test on March 31, 2008, and this test did not reveal indications of impairment.

Litigation Accruals. Pending unsettled lawsuits involve complex questions of fact and law and may require expenditure of significant funds. From time to time, we may enter into confidential discussions regarding the potential settlement of such lawsuits; however, there can be no assurance that any such discussions will occur or will result in a settlement. Moreover, the settlement of any pending litigation could require us to incur settlement payments and costs. In the period in which a new legal case arises, an expense will be accrued if our liability to the other party is probable and can be reasonably estimated. On a quarterly basis, we review and analyze the adequacy of our accruals for each individual case for all pending litigations. Adjustments are recorded as needed to ensure appropriate levels of reserve. Our attorney fees and other defense costs related to litigation are expensed as incurred.

Self-Insurance. Effective January 1, 2006, we became self-insured for certain losses related to employee health and dental benefits. We record a liability based on an estimate of claims incurred but not recorded determined based on actuarial analysis of historical claims experience and historical industry data. We maintain individual and aggregate stop-loss coverage with a third party insurer to limit our total exposure for these programs. Our self-insurance liability contains uncertainties because the calculation requires management to make assumptions and apply judgment to estimate the ultimate cost to settle reported claims and claims incurred but not reported as of the balance sheet date. We do not believe that there is a reasonable likelihood that there will be a material change in the future assumptions or estimates we use to calculate our self-insurance liability. However, if actual results are not consistent with our assumptions and estimates, we may be exposed to losses or gains that could be material.

 

16


Table of Contents

Bonus Accrual. Our bonus model is designed to project the level of funding required under the bonus program as approved by the Compensation Committee of the Board of Directors. A significant portion of the bonus program is based on the Company meeting certain financial objectives, such as revenue, free cash flow, and pro-forma earnings (adjusted EBITDA). The expense related to the bonus program is accrued in the year of performance and paid in the first quarter following the fiscal year end. The bonus model is analyzed and adjusted on a quarterly basis as necessary based on achievement of targets.

Income Taxes. We account for income taxes under Statement of Accounting Financial Standards No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). This statement requires the recognition of deferred tax assets and liabilities for the future consequences of events that have been recognized in our financial statements or tax returns. The measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and the tax bases of our assets and liabilities result in a deferred tax asset, SFAS No. 109 requires an evaluation of the probability of being able to realize the future benefits indicated by such an asset. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion or the entire deferred tax asset will not be realized. We review the need for a valuation allowance on a quarterly basis and believe that there is sufficient certainty regarding the realizability of substantially all of our deferred tax assets.

On January 1, 2007, we adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 applies to all tax positions accounted for under SFAS No. 109, “Accounting for Income Taxes,” and defines the confidence level that a tax position must meet in order to be recognized in the financial statements. This interpretation requires that the tax effects of a position be recognized only if it is “more-likely-than-not” to be sustained by the taxing authority as of the reporting date. We recognize interest and/or penalties associated with uncertain tax positions in income tax expense.

Share-Based Awards. Under the fair value recognition provisions of FASB Statement No. 123R, “Share-Based Payment,” (“SFAS 123R”), stock-based compensation cost is estimated at the grant date based on the award’s fair-value and is recognized as expense ratably over the requisite service period. We use the Black-Scholes option-pricing model to calculate fair value which requires the input of highly subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (“expected term”), the estimated volatility of our common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation could be materially different in the future. In addition, if our actual forfeiture rate is materially different from our estimate, stock-based compensation expense could be significantly different from what we have recorded in the current period. We recognize share-based compensation cost over the requisite service period using the straight-line single option method.

Recent Accounting Pronouncements

In December 2007, the FASB issued “Business Combinations,” (“FAS 141R”). FAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination, recognizing assets acquired and liabilities assumed arising from contingencies, and determining what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. FAS 141R is effective for fiscal years beginning after December 15, 2008. We expect FAS 141R will have an impact on our consolidated financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions we consummate after the effective date.

In December 2007, the FASB issued “Noncontrolling Interests in Consolidated Financial Statement” (“FAS 160”). FAS 160 amends ARB 51 to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements. Consolidated net income should include the net income for both the parent and the noncontrolling interest with disclosure of both amounts on the consolidated statement income. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. FAS 160 is effective for fiscal years beginning after December 15, 2008. We are currently evaluating the impact, if any, FAS 160 will have on our consolidated financial statements.

 

17


Table of Contents

Revenue Information

Revenue by customer type and revenue mix for the three months ended March 31, 2008, and 2007, respectively, is as follows (amounts in thousands):

 

     Three Months Ended
March 31,
 
     2008     2007  

Revenue by customer type:

          

Health plans

   $ 99,026    93 %   $ 104,291    92 %

Benefits administration

     7,794    7 %     9,212    8 %
                          

Total revenue

   $ 106,820    100 %   $ 113,503    100 %
                          

Revenue mix:

          

Services and other revenue

          

Outsourced business services

   $ 24,022    22 %   $ 24,168    21 %

Software maintenance

     33,235    31 %     29,813    26 %

Consulting services and other

     32,790    31 %     35,794    32 %
                  

Services and other revenue total

     90,047        89,775   
                  

Products revenue

          

Perpetual license fees

     12,108    11 %     20,485    18 %

Term license fees

     4,665    5 %     3,243    3 %
                  

Products revenue total

     16,773        23,728   
                          

Total revenue

   $ 106,820    100 %   $ 113,503    100 %
                          

Our total backlog is defined as the revenue we expect to generate in future periods from existing customer contracts. Our 12-month backlog is defined as the revenue we expect to generate from existing customer contracts over the next 12 months. Most of the revenue in our backlog is derived from multi-year service revenue contracts (including software hosting, business process outsourcing, IT outsourcing, and software maintenance with periods up to seven years), term software license fees, and consulting contracts. Consulting revenue is included in the backlog when the revenue from such consulting contract is expected to be recognized over a period exceeding 12 months.

Backlog can change due to a number of factors, including unforeseen changes in implementation schedules, contract cancellations (subject to penalties paid by the customer), or customer financial difficulties. In such event, unless we enter into new customer agreements that generate enough revenue to replace or exceed the revenue we expect to generate from our backlog in any given quarter, our backlog will decline. Our backlog at any date may not indicate demand for our products and services and may not reflect actual revenue for any period in the future. Our 12-month and total backlog data are as follows (in thousands):

 

     3/31/08    12/31/07    9/30/07    6/30/07    3/31/07

12-month backlog

   $ 310,600    $ 238,400    $ 225,500    $ 229,000    $ 236,700
                                  

Total backlog

   $ 1,144,800    $ 982,600    $ 941,100    $ 944,400    $ 964,800
                                  

Total quarterly bookings equal the estimated total dollar value of the contracts signed in the quarter. Bookings can vary substantially from quarter to quarter, based on a number of factors, including the number and type of prospects in our pipeline, the length of time it takes a prospect to reach a decision and sign the contract, and the effectiveness of our sales force. Included in quarterly bookings are up to seven years of maintenance revenue and hosting and other services revenue. Bookings for each of the quarters are as follows (in thousands):

 

     3/31/08    12/31/07    9/30/07    6/30/07    3/31/07

Quarterly bookings

   $ 236,400    $ 163,200    $ 74,500    $ 93,800    $ 99,900
                                  

 

18


Table of Contents

RESULTS OF OPERATIONS

Quarter Ended March 31, 2008 Compared to the Quarter Ended March 31, 2007.

Revenue. Total revenue decreased $6.7 million, or 6%, from $113.5 million in the first quarter of 2007 to $106.8 million for the same period in 2008. This decrease consisted of a $7.0 million decrease related to products revenue offset by an increase of $300,000 in services and other revenue.

Services and Other Revenue. Services and other revenue includes outsourced business services (primarily software hosting and business process outsourcing), maintenance fees related to our software license contracts, consulting services and other revenue. Services and other revenue increased approximately $300,000, or less than 1%, to $90.0 million in the first quarter of 2008 from $89.8 million for the same period in 2007. The net increase was driven primarily by $3.4 million in higher software maintenance revenues triggered by large software license sales in late 2007 and the impact of the annual consumer price index increases in the first quarter of 2008. This increase was partially offset by a $3.0 million decrease in consulting and other services revenue while outsourced business services revenue remained relatively flat. The decrease in consulting and other services revenue was unfavorably impacted by the completion of certain large client implementations in middle to late 2007, in addition to delays in certain implementations for new engagements in the first quarter of 2008. Outsourced business services revenue decreased $4.7 million due primarily to certain contract terminations, including the impact of QCA, which more than offset the $4.6 million increase related to increased membership for new and existing customers.

Products Revenue. Products revenue, which includes software license sales, decreased $7.0 million, or 29%, from $23.7 million in the first quarter of 2007 to $16.8 million for the same period in 2008. The decrease was due primarily to a decrease in perpetual license fees of $8.4 million offset by an increase in term license fees of $1.4 million.

Cost of Revenue – Services and Other. Cost of revenue for services and other includes costs for outsourced business services (primarily software hosting and business process outsourcing), consulting services and other revenue. Cost of revenue for services and other decreased $1.7 million, or 4%, from $49.6 million in the first quarter of 2007 to $47.9 million for the same period in 2008. The $1.7 million decrease was driven primarily by cost of revenue for consulting services, which had a $1.9 million reduction in the utilization of outside contractors and a decrease in overall travel of $650,000. These decreases were largely offset by higher compensation and related costs of $1.1 million impacted by increased headcount and the 2008 annual merit increases. Cost of revenue for outsourced business services remained relatively flat overall, although a decrease in costs of $2.1 million from the termination of the QCA services agreement was largely offset by higher compensation and related costs of $2.0 million. As a percentage of total revenue, cost of revenue for services and other approximated 53% in the first quarter of 2008 compared with 55% for the same period in 2007.

Cost of Revenue - Products. Cost of revenue for products, excluding the amortization of acquired technology, decreased $600,000, or 11%, from $5.2 million in the first quarter of 2007 to $4.6 million for the same period in 2008. The overall decrease was due primarily to lower compensation and related costs of $500,000. As a percentage of total revenue, cost of revenue for products approximated 28% in the first quarter of 2008 compared with 22% for the same period in 2007.

Gross Margin. Gross margin, excluding the amortization of acquired technology and other intangibles, dropped slightly to 51% in the first quarter of 2008 compared to 52% in the first quarter of 2007. Gross margin was unfavorably impacted by a lower-margin mix of revenue, but offset favorably by operating efficiencies and pricing improvements.

Research and Development (R&D) Expenses. R&D expenses decreased $600,000, or 4%, from $15.7 million in the first quarter of 2007 to $15.1 million for the same period in 2008. The overall decrease in R&D expenses was due primarily to $750,000 in lower compensation and related costs impacted by higher levels of maintenance support work performed by the development team, partially offset by an increase related to the 2008 annual merit increases. In addition, the lower utilization of outside contractors contributed to $250,000 of the overall decrease. These decreases were partially offset by increases in R&D investment in infrastructure and technology costs and facility-related costs for a total of $500,000. As a percentage of total revenue, R&D expenses approximated 14% in the first quarters of both 2008 and 2007. R&D expenses, as a percentage of total R&D spending (which includes capitalized R&D costs of $1.8 million in the first quarter of 2008 and $1.7 million for the same period in 2007), was 89% in the first quarter of 2008 compared to 90% in the first quarter of 2007.

Selling, General and Administrative (SG&A) Expenses. SG&A expenses increased $980,000, or 4%, to $28.8 million in the first quarter of 2008 from $27.8 million for the same period in 2007. The net increase in SG&A expenses was due primarily to $1.0 million in higher compensation and related costs impacted by increased headcount and the 2008 annual merit increases, an increase in commissions of $950,000 due to higher bookings in the first quarter of 2008, $800,000 in costs associated with the definitive merger agreement to sell the company to Apax Partners, and higher sales and marketing expenses of $550,000 resulting from an increase in trade show activity. These increases were largely offset by an $800,000 decrease in the utilization of outside contractors primarily for corporate strategy projects, a reduction in recruiting and relocation fees of $400,000 attributed primarily to the accounting department transition to Colorado, $500,000 in lower fees related primarily to other professional fees, and a $200,000 decrease in depreciation expense. As a percentage of total revenue, selling, general and administrative expenses approximated 27% in the first quarter of 2008 compared with 25% for the same period in 2007.

 

19


Table of Contents

Amortization of Intangible Assets. Amortization of intangible assets is comprised of acquired technology and acquired other intangible assets. In total, amortization of intangible assets decreased $200,000, or 7%, from $3.0 million in the first quarter of 2007 to $2.8 million for the same period in 2008 related to adjustments for the final valuation of intangible assets for the PDM and QCSI acquisitions.

Interest Income. Interest income increased $1.4 million, or 188%, to $2.2 million in the first quarter of 2008 from $800,000 for the same period in 2007. The increase was due primarily to higher cash balances in our investment accounts.

Interest Expense. Interest expense increased $700,000, or 24%, to $3.3 million in the first quarter of 2008 from $2.6 million for the same period in 2007. The net increase is due primarily to a $1.0 million increase related to our convertible notes partially offset by a $250,000 decrease due to the payoff of certain capital lease obligations and lower interest rates on borrowings from our credit facility.

Provision for Income Taxes. Provision for income taxes was $2.6 million in the first quarter of 2008 compared to $4.4 million for the same period in 2007. The effective tax rate was 40.0% for the first quarter of 2008 compared with 42.5% for the same period in 2007. The decrease to the effective tax rate is due in part to claiming the Federal section 199 manufacturing deduction, various state R&D tax credits and changes to state income taxes.

LIQUIDITY AND CAPITAL RESOURCES

Capital Resources

As of March 31, 2008, cash available to fund our operations includes cash and cash equivalents totaling $162.2 million. Our principal sources of liquidity include cash from operations, borrowings under our debt facility, proceeds from the issuance of convertible debt, cash obtained from our acquisitions, employee exercises of stock options and private financings, described as follows:

 

   

In October 2005, we issued $100.0 million aggregate principal amount of 2.75% Convertible Senior Notes due 2025 (the “2025 Notes”). The 2025 Notes are convertible, at the holder’s option in certain circumstances, into shares of our common stock at an initial conversion price of $18.85 per share, or 53.0504 shares for each $1,000 principal amount of 2025 Notes, subject to certain adjustments. The maximum conversion rate is 68.9655 shares for each $1,000 principal amount of 2025 Notes. The 2025 Notes bear interest at a rate of 2.75%, which is payable in cash semi-annually.

 

   

In January 2007, we amended and restated our Credit Agreement, initially established December 21, 2004, to add a term loan of up to $150.0 million and to extend the expiration date of the Credit Agreement, including our $100.0 million revolving credit facility, to January 5, 2011. As of March 31, 2008, we no had outstanding borrowings on the revolving line of credit and were in compliance with all applicable covenants and other restrictions under the Credit Agreement. In January 2007, we borrowed $75.0 million under the term loan to help fund our acquisition of QCSI, of which $67.0 million was outstanding as of March 31, 2008. We can borrow up to an additional $75.0 million under the term loan through and including March 31, 2009, at which time no additional funds can be borrowed under the term loan.

 

   

In April 2007, we issued $230.0 million aggregate principal amount of 1.125% Convertible Senior Notes due 2012 (the “2012 Notes”). The 2012 Notes are convertible, at the holder’s option in certain circumstances, into shares of our common stock at an initial conversion price of $21.97 per share, or 45.5114 shares for each $1,000 principal amount of 2012 Notes, subject to certain adjustments. The maximum conversion rate is 53.4759 shares for each $1,000 principal amount of 2012 Notes. The 2012 Notes bear interest at an annual rate of 1.125%, which is payable in cash semi-annually.

In January 2008, we invested $72.3 million in taxable note investments with an auction reset function (“auction rate securities”) collateralized by student loans which are substantially backed by the federal government and state agencies. Beginning in February 2008, auctions for our auction rate securities failed due to conditions in the market. A failed auction results in a lack of liquidity in the securities but does not signify a default by the issuer. Upon an auction failure, the interest rates do not reset at a market rate but instead reset based on a formula contained in the security. As of March 31, 2008, all of our auction rate securities continue to be rated AAA by Standard & Poor’s or Aaa by Moody’s despite the auction failures.

On March 31, 2008, with the assistance of our investment advisor, we determined the fair value of the auction rate securities no longer approximated their par value based on a discounted cash flow valuation model that was based on the collateralization of the underlying securities, the credit rating of the investment, the timing of expected future cash flows, and

 

20


Table of Contents

the expected duration until the securities trade again. As a result, we concluded that the auction rate securities were temporarily impaired and recorded an unrealized loss of approximately $3.4 million to reflect the revised fair value of the auction rate securities at $68.9 million. Given the uncertainty as to when the market conditions will recover and auctions will resume, we have classified the auction rate securities as long-term investments.

We reviewed the classification of the impairment charges in accordance with the appropriate accounting literature, and concluded the impairment is temporary as of March 31, 2008. A temporary impairment charge results in an unrealized loss being recorded in the accumulated other comprehensive income component of stockholders’ equity. We believe this treatment is appropriate because we have concluded the loss in value attributable to its auction rate securities is temporary in nature and we have both the ability and intent to hold the auction rate securities until a recovery in market value takes place. We will continue to monitor and analyze our auction rate securities investments to determine whether the impairment continues to exist, and if so, how the impairment should be classified.

Based on our current operating plan, we believe that existing cash and cash equivalents balances, cash forecasted by management to be generated by operations and borrowings from existing credit facilities will be sufficient to meet our working capital and capital requirements for at least the next 12 months. However, if events or circumstances occur such that we do not meet our operating plan as expected, we may be required to seek additional capital and/or reduce certain discretionary spending, which could have a material adverse effect on our ability to achieve our business objectives. We may seek additional financing, which may include debt and/or equity financing or funding through third party agreements. There can be no assurance that any additional financing will be available on acceptable terms, if at all. Any equity financing may result in dilution to existing stockholders and any debt financing may include restrictive covenants.

Summary of Cash Activities

As of March 31, 2008, we had cash and cash equivalents totaling $162.2 million. Significant cash flow activities for the three months ended March 31, 2008 and 2007 are as follows (in thousands):

 

     Three Months Ended
March 31,
 
     2008     2007  

Cash provided by operating activities

   $ 37,404     $ 24,565  

Purchase of investments

     (77,200 )     (8,650 )

Sale of investments

     4,900       8,650  

Purchase of property and equipment and software licenses

     (2,354 )     (4,510 )

Capitalization of software development costs

     (1,779 )     (1,700 )

Acquisitions, net of cash acquired

     (9,622 )     (142,640 )

Proceeds from revolving line of credit, debt financings and capital leases

     495       162,200  

Payments on revolving line of credit, notes payable and capital leases

     (4,480 )     (85,683 )

Employee exercises of stock options and purchase of common stock

     3,416       7,525  

Excess tax benefits from stock-based compensation

     4,636       —    

Repurchase of common stock to treasury

     (1,684 )     —    

Cash and cash equivalents decreased $46.3 million in the first quarter of 2008 from $208.5 million at December 31, 2007 to $162.2 million at March 31, 2008. This decrease was primarily due to the purchase of investments of $77.2 million, a cash payment of $9.6 million to former QCSI stockholders, warrantholders, and optionholders (which included a $2.6 million Holdback payment along with a $7.0 million contingent consideration earned as of December 31, 2007), payments on our debt (including our revolving line of credit) of $4.5 million, $4.1 million for capital spending, and a $1.7 million payment for the repurchase of common stock. These cash outflows were offset by cash provided by operating activities of $37.4 million, sale of investments of $4.9 million, $4.6 million of tax benefits related to stock-based compensation, $3.4 million in proceeds from employee option exercises, and net proceeds from debt financing of $500,000.

 

21


Table of Contents

Commitments and Contingencies

The following tables summarize our estimated contractual obligations and other commercial commitments as of March 31, 2008 (in thousands):

 

     Payments (including interest) Due by Period

Contractual obligations

   Total    Less than
1 Year
   1-3
Years
   3-5
Years
   More than 5
Years

Short-term debt

   $ 395    $ 395    $ —      $ —      $ —  

Capital lease obligations

     2,165      886      1,279      —        —  

Operating leases

     57,562      10,186      26,103      21,273      —  

Convertible debt

     391,174      5,337      10,675      239,381      135,781
                                  

Total contractual obligations

   $ 451,296    $ 16,804    $ 38,057    $ 260,654    $ 135,781
                                  
     Amount of Commitment Expiration per Period

Other commercial commitments

   Total Amounts
Committed
   Less Than
1 Year
   1-3
Years
   3-5
Years
   More than 5
Years

Term loan

   $ 75,327    $ 14,308    $ 61,019    $ —      $ —  

Standby letters of credit

     1,740      348      1,308      —        84
                                  

Total other commercial commitments

   $ 77,067    $ 14,656    $ 62,327    $ —      $ 84
                                  

Convertible debt represents scheduled principal and interest payments for our 2025 Notes and 2012 Notes, which includes $100.0 million and $230.0 million aggregate principal amounts, respectively. The 2025 Notes bear interest at a rate of 2.75%, which is payable in cash semi-annually in arrears on April 1 and October 1 of each year, and commenced on April 1, 2006, to the holders of record on the preceding March 15 and September 15, respectively. The 2025 Notes mature on October 1, 2025. However, on or after October 5, 2010, we may from time to time at our option redeem the 2025 Notes, in whole or in part, for cash, at the applicable redemption date. Additionally, holders of the 2025 Notes may require us to purchase all or a portion of their 2025 Notes in cash on each of October 1, 2010, October 1, 2015 and October 1, 2020. The 2012 Notes bear interest at a rate of 1.125%, which is payable in cash semi-annually in arrears on April 15 and October 15 of each year, and commenced on October 15, 2007, to the holders of record on the preceding April 1 and October 1, respectively. The 2012 Notes mature on April 15, 2012.

As of March 31, 2008, we had outstanding four unused standby letters of credit in the aggregate amount of $1.7 million, which serve as security deposits for certain operating leases.

Excluded from the tables above are certain potential payments to CareKey stockholders and optionholders as these payments are contingent upon the achievement of financial milestones and are payable in either cash or stock at our election. CareKey stockholders and optionholders are entitled to receive three contingent consideration payments of $8.3 million each (up to $25.0 million), upon the achievement of certain revenue milestones during the period beginning upon acquisition and ending December 31, 2008. In addition, further consideration payable in cash or stock at our election, may be paid to former CareKey stockholders and optionholders if, prior to December 31, 2008, the acquired CareKey products generate revenues in excess of certain revenue milestones and/or if a negotiated multiple of software maintenance revenues of acquired CareKey products during the fiscal year ended December 31, 2009 exceed total purchase consideration made to those former CareKey stockholders and optionholders.

Also excluded from the tables above are certain potential payments to former PDM stockholders and optionholders. PDM security holders may be entitled to receive additional contingent consideration as follows: $5.0 million on or before December 31, 2008 and $8.0 million on or before December 31, 2009, each subject to reduction if certain revenue thresholds are not satisfied during the applicable measurement period or to the extent TriZetto is entitled to claims for indemnification as specified in the Merger Agreement. Additional contingent consideration may be paid on June 30, 2009 if certain specified revenue thresholds are satisfied, provided that in no event will the aggregate consideration of all payments exceed $42.0 million. The contingent consideration is payable in a combination of cash and common stock.

Due to the uncertainty with respect to the timing of future cash flows associated with the Company’s cumulative unrecognized tax benefits recorded in accordance with FIN 48 at March 31, 2008, the Company is unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities as it relates to the $11.0 million of unrecognized tax benefits.

 

22


Table of Contents

OFF-BALANCE SHEET ARRANGEMENTS

The Company does not currently have any relationships with unconsolidated entities or financial partnerships, such as entities referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet or other contractually narrow or limited purposes.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk associated with adverse changes in financial and commodity market prices and rates could impact our financial position, operating results or cash flows. We are exposed to market risk due to changes in interest rates such as the prime rate and LIBOR. This exposure is directly related to our normal operating and funding activities.

The interest rate on our $100.0 million revolving credit facility and $150.0 million term loan is a per annum rate equal to either (i) the LIBOR rate plus an adjustable applicable margin of between 1.75% and 3.50% or (ii) the lending institution’s prime rate plus an adjustable applicable margin of between 0.0% and 2.0%, at our election, subject to specified restrictions, and is payable monthly in arrears or upon maturity date. The revolving credit facility and term loan expire in January 2011. As of March 31, 2008, we had outstanding no borrowings on the revolving line of credit and $67.0 million outstanding borrowings on the term loan.

In October 2005, we issued $100.0 million aggregate principal amount of 2.75% Convertible Senior Notes due 2025 (the “2025 Notes”). The 2025 Notes are convertible into shares of our common stock at an initial conversion price of $18.85 per share, or 53.0504 shares for each $1,000 principal amount of 2025 Notes, subject to certain adjustments. The maximum conversion rate is 68.9655 shares for each $1,000 principal amount of 2025 Notes. The 2025 Notes were issued pursuant to an Indenture, dated October 5, 2005, by and between us and Wells Fargo Bank, National Association, as trustee. The 2025 Notes bear interest at a rate of 2.75%, which is payable in cash semi-annually in arrears on April 1 and October 1 of each year, and commenced on April 1, 2006, to the holders of record on the preceding March 15 and September 15, respectively.

In April 2007, we issued $230.0 million aggregate principal amount of 1.125% Convertible Senior Notes due 2012 (the “2012 Notes”). The 2012 Notes are convertible into shares of our common stock at an initial conversion price of $21.97 per share, or 45.5114 shares for each $1,000 principal amount of 2012 Notes, subject to certain adjustments. The maximum conversion rate is 53.4759 shares for each $1,000 principal amount of 2012 Notes. The 2012 Notes were issued pursuant to an Indenture, dated April 17, 2007, by and between us and Wells Fargo Bank, National Association, as trustee. The 2012 Notes bear interest at a rate of 1.125%, which is payable in cash semi-annually in arrears on April 15 and October 15 of each year, and commenced on October 15, 2007, to the holders of record on the preceding April 1 and October 1, respectively.

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. We also manage interest rate risk by closely managing our borrowings on our credit facility based on our operating needs in order to minimize the interest expense incurred. As a result, we do not believe that near-term changes in interest rates will result in a material effect on our future earnings, fair values or cash flows.

 

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and our principal accounting officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Additionally, there were no changes in our internal controls over financial reporting during the quarter ended March 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

23


Table of Contents

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

On April 15, 2008, two complaints were filed against us and members of our Board of Directors seeking to enjoin the proposed merger with Apax Partners, L.P. In the first case, Plaintiff David P. Simonetti Rollover IRA filed a Verified Class Action Complaint in The Court of Chancery of the State of Delaware, entitled David P. Simonetti Rollover IRA, Individually and On Behalf of All Others Similarly Situated, Plaintiff, v. Jeffrey H. Margolis, Donald J. Lothrop, Thomas B. Johnson, Paul F. Lefort, Jerry P. Widman, Nancy H. Handel, L. William Krause, Apax Partners, L.P., TZ Holdings, L.P., TZ Merger Sub, Inc., and The TriZetto Group Inc., Defendants, Case No. 3694. The complaint seeks certification of a class of all common stockholders of TriZetto who are allegedly harmed by the defendants’ actions challenged in the complaint, a declaration that the defendants have breached their fiduciary and other duties, entry of an order requiring defendants to take certain steps in connection with the proposed transaction, compensatory damages, costs and disbursements, including plaintiff’s counsel’s fees and experts’ fees, and other relief.

In the second case, Plaintiff City of Fort Lauderdale Police and Firefighters’ Retirement System filed a Complaint Based Upon Self-Dealing and Breach of Fiduciary Duty in the Superior Court of the State of California, County of Orange, entitled City of Fort Lauderdale Police and Firefighters’ Retirement System, on Behalf of Itself and All Others Similarly Situated, Plaintiff, v. Jeffrey H. Margolis, Paul F. Lefort, Nancy H. Handel, Thomas N. Johnson, L. William Krause, Donald J. Lothrop, Jerry P. Widman, The TriZetto Group, Inc., and Apax Partners, Defendants, Case No. 30-2008-00061215. The complaint seeks certification of a class of all holders of TriZetto’s stock who are allegedly harmed by the defendants’ actions challenged in the complaint, a declaration that the Agreement and Plan of Merger was entered into in breach of defendants’ fiduciary duties and is therefore unlawful and unenforceable, injunctive relief enjoining defendants and others from consummating the proposed transaction, rescission, a constructive trust, and costs and disbursements, including attorneys’ and experts’ fees, among other requested relief.

On May 7, 2008, a third complaint was filed against us and members of our Board of Directors seeking to enjoin the proposed merger. In the third case, Plaintiff Police and Fire Retirement System of the City of Detroit filed a Complaint Based Upon Self-Dealing and Breach of Fiduciary Duties in the Superior Court of the State of California, County of Orange, entitled Police and Fire Retirement System of the City of Detroit, on Behalf of Itself and All Others Similarly Situated, Plaintiff, v. The TriZetto Group Inc., Jeffrey H. Margolis, Donald L. Lothrop, Thomas B. Johnson, Paul F. Lefort, Jerry P. Widman, Nancy H. Handel, L. William Krause, Apax Partners, L.P., TZ Holdings, L.P., and TZ Merger Sub, Inc., Defendants, Case No. 30-2008-00180024. The complaint seeks certification of a class of all holders of TriZetto’s stock who are allegedly harmed by the defendants’ actions challenged in the complaint, a declaration that the Agreement and Plan of Merger was entered into in breach of defendants’ fiduciary duties, injunctive relief enjoining defendants from disenfranchising the proposed class and consummating the proposed transaction, and costs and disbursements, including attorneys’ fees, among other requested relief.

In addition to the matters described above, we are involved in litigation from time to time relating to claims arising out of our operations in the normal course of business. Except as discussed above, as of the filing date of this quarterly report on Form 10-Q, we were not a party to any other 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, financial position and/or cash flows.

 

Item 1A. Risk Factors

Cautionary Statement

This report, and other documents and statements provided or made by us, contain forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These statements may include statements about our future revenues, profits, results, the market for our products and services, future service offerings, industry trends, client and partner relationships, our operational capabilities, future financial structure and uses of cash or proposed transactions. 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 following risks:

The pending merger and/or the delay or failure to complete the merger with TZ Holdings, L.P. could materially and adversely affect our results of operations and our stock price.

On April 11, 2008, we entered into a definitive merger agreement with TZ Holdings, L.P. (“TZ Holdings”) an entity that is, or will at the time of consummation of the merger be, owned by affiliates of Apax Partners, L.P., BlueCross BlueShield of Tennessee, Inc. and Regence BlueCross BlueShield of Oregon, Regence BlueCross BlueShield of Utah and Regence Blue Shield. Consummation of the merger is subject to customary closing conditions, regulatory approvals, TZ Holdings’ ability to obtain financing, and approval by our stockholders. We cannot assure you that these conditions will be met or waived, that the necessary approvals and financing will be obtained, or that we will be able to successfully consummate the merger as currently contemplated under the merger agreement or at all. As a result of the pending merger:

 

   

the attention of our management and our employees may be diverted from day-to-day operations as they focus on consummating the merger;

 

24


Table of Contents
   

the merger agreement places a variety of restrictions and constraints on the conduct of our business prior to the closing of the merger or the termination of the merger agreement;

 

   

our customers may seek to modify or terminate existing agreements, or prospective customers may delay entering into new agreements or purchasing our products as a result of the announcement of the merger, which could cause our revenues to materially decline or any anticipated increases in revenue to be lower than expected; and

 

   

our ability to attract new employees and retain our existing employees may be harmed by uncertainties associated with the merger, and we may be required to incur substantial costs to recruit replacements for lost personnel.

A delay in the consummation of the merger may exacerbate the occurrence of these events.

Furthermore, in the event that the proposed merger is not completed:

 

   

our investors will not receive $22.00 in cash per share of our common stock which TZ Holdings has agreed to pay in the merger, and our stock price would likely experience a significant decline;

 

   

we may be liable for significant transaction costs, including legal, accounting, financial advisory and other costs relating to the merger; and

 

   

under some circumstances, we may have to pay a termination fee to TZ Holdings in the amount of $50 million.

The occurrence of any of these events individually or in combination could have a material adverse effect on our results of operations and our stock price.

We and TZ Holdings may not be able to obtain, or may be delayed in obtaining, the regulatory approvals required to consummate the merger.

Completion of the merger is conditioned upon the receipt of all required governmental consents, authorizations and regulatory approvals. Complying with requests from such governmental agencies, including requests for additional information and documents, could delay consummation of the merger. In connection with granting these consents and authorizations, governmental authorities may seek to impose conditions on the merger. Such conditions may jeopardize or delay completion of the merger.

TZ Holdings may not be able to obtain the debt financing required to consummate the merger.

In order to complete the merger, TZ Holdings will need to successfully obtain debt financing for a portion of the purchase price. Given the current state of the credit markets, TZ Holdings may find it difficult or practically impossible to obtain debt financing under the terms of its debt commitment from Royal Bank of Canada or from alternative sources of financing. The inability of TZ Holdings to timely obtain debt financing may delay the completion of the merger. In addition, there can be no assurance that TZ Holdings will be able to obtain the debt financing required to complete the merger.

Purported stockholder class action lawsuits have been filed against us and members of our Board of Directors challenging the proposed merger.

As set forth under “Item 1. Legal Proceedings,” three putative stockholder class action complaints have been filed against us and members of our Board of Directors seeking to enjoin the proposed merger. The plaintiffs in this litigation seek, among other things, injunctive relief to prevent the consummation of the merger and monetary relief. The defense of this litigation will require us to incur legal fees and costs. An unfavorable resolution of any such litigation surrounding the proposed merger could delay or prevent the consummation of the merger, result in significant costs, or both.

We cannot predict if we will be able to sustain our positive net income.

We may not be able to sustain or increase our current level of revenue or positive net income. We currently derive our revenue primarily from providing hosted solutions, software licensing and maintenance, and other services such as consulting. We depend on the continued demand for healthcare information technology and related services. We plan to continue investing in administrative infrastructure, research and development, sales and marketing, and acquisitions. If we are not able to sustain our current levels of revenue or maintain our profitability, our operations may be adversely affected.

 

25


Table of Contents

Revenue from a limited number of customers comprises a significant portion of our total revenue, and if these customers terminate or modify existing contracts or experience business difficulties, it could adversely affect our earnings.

As of March 31, 2008, we were providing services to 354 unique customers. One of our customers, the Regence Group, represented approximately 10.9% of our consolidated revenue in the first quarter of 2008. 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 hosted customers without long-term contracts. In addition, many of our contracts are structured so that we generate revenue based on units of volume, which include the number of members, number of workstations or number of users. If our customers experience business difficulties and the units of volume decline or if a customer ceases operations for any reason, we will generate less revenue under these contracts and our operating results may be materially and adversely impacted.

Our operating expenses are relatively fixed and cannot be reduced on short notice to compensate for unanticipated contract cancellations or reductions. As a result, any termination, significant reduction or modification of our business relationships with any of our significant customers could have a material adverse effect on our business, financial condition, operating results and cash flows.

Our business is changing rapidly, which could cause our quarterly operating results to vary and our stock price to fluctuate.

Our quarterly operating results have varied in the past, and we expect that they will continue to vary in future periods. Our quarterly operating results can vary significantly based on a number of factors, such as:

 

   

our mix of products and services revenue;

 

   

whether our customers choose to license our software under terms and conditions that require revenues to be deferred or recognized ratably over time rather than upfront;

 

   

our ability to add new customers and renew existing accounts;

 

   

selling additional products and services to existing customers;

 

   

long and unpredictable sales cycles;

 

   

meeting project milestones and customer expectations;

 

   

seasonality in information technology purchases;

 

   

the timing of new customer sales; and

 

   

general economic conditions.

Variations in our quarterly operating results could cause us to not meet the earnings estimates of securities analysts or the expectations of our investors, which could affect the market price of our common stock in a manner that may be unrelated to our long-term operating performance.

We base our expense levels in part upon our expectations concerning future revenue, and these expense levels are relatively fixed in the short-term. If we do not achieve our expected revenue targets, 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.

The intensifying competition we face from both established entities and new entries in the market may adversely affect our revenue and profitability.

The market for our technology and services is highly competitive and rapidly changing and requires potentially expensive technological advances. 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.

 

26


Table of Contents

Our competitors can be categorized as follows:

 

   

information technology and outsourcing companies, such as Perot Systems Corporation, IBM, Affiliated Computer Services, DST Systems Inc., Electronic Data Systems Corporation and Infocrossing (Wipro);

 

   

healthcare information software vendors, including DST Systems Inc., Perot Systems Corporation, Electronic Data Systems Corporation, and Plexis Healthcare Systems in the health plan market, as well as Mphasis Healthcare Solutions (formerly Eldorado Computing) and SBPA in the benefits administration market, and MMC 2020, Gorman and Dynamics in the Medicare Advantage market;

 

   

healthcare information technology consulting firms, such as First Consulting Group Inc. (being acquired by CSC), Proxicom (acquired by iCrossing) and the consulting divisions or former affiliates of the major accounting firms, such as Deloitte Consulting and Accenture;

 

   

healthcare e-commerce and portal companies, such as BenefitFocus, HLTH Corporation (formerly Emdeon/WebMD), Healthation, HealthTrio, AVOLENT, and edocs;

 

   

enterprise application integration vendors such as Vitria, SeeBeyond, TIBCO, Fuego (acquired by BEA) and M2;

 

   

care management software and service companies such as McKesson, MEDecision, HealthTrio, Landacrop, HLTH Corporation (WebMD), and Click4Care;

 

   

network management vendors such as Portico and McKesson;

 

   

consumer retail software and services companies such as CareGain and FiServ; and

 

   

health plans, themselves, some of whom are providing hosting and BPO services to the marketplace and leveraging capabilities across the aggregated membership of multiple organizations.

Further, other entities that do not presently compete with us may do so in the future, including major software information systems companies and financial services entities.

We believe our ability to compete will depend in part upon our ability to:

 

   

enhance our current technology and services;

 

   

respond effectively to technological changes;

 

   

introduce new capabilities for current and new market segments;

 

   

meet the increasingly sophisticated needs of our customers; and

 

   

maintain and continue to develop partnerships with vendors.

Increased competition may result in price reductions, reduced margins, and loss of market share, any of which could have a material adverse effect on our results of operations. In addition, pricing, margins, and market share could be negatively impacted further as a greater number of available products in the marketplace increases the likelihood that product and service offerings in our markets become more fungible and price sensitive.

Our sales and implementation cycles are long and unpredictable.

We have experienced and continue to experience long and unpredictable sales cycles, particularly for contracts with large customers, or customers purchasing multiple products and services. Enterprise software typically requires significant capital expenditures by customers, and the decision to outsource IT-related services is complicated and time-consuming. Major purchases by large payer organizations typically range from nine to 12 months or more from initial contact to contract execution. The prospects currently in our pipeline may not sign contracts within a reasonable period of time or at all.

In addition, our implementation cycle has ranged from 12 to 24 months or longer from contract execution to completion of implementation. During the sales cycle and the implementation cycle, we will expend substantial time, effort, and financial resources preparing contract proposals, negotiating the contract, and implementing the solution. We may not realize any revenue to offset these expenditures, and, if we do, accounting principles may not allow us to recognize the revenue during corresponding periods, which could harm our future operating results. Additionally, any decision by our customers to delay implementation may adversely affect our revenues.

 

27


Table of Contents

Consolidation of healthcare payer organizations and benefits administrators could decrease the number of our existing and potential customers.

There has been and continues to be acquisition and consolidation activity among healthcare payers and benefits administrators. Mergers or consolidations of payer organizations in the future could decrease the number of our existing and potential customers. The acquisition of a customer could reduce our revenue and have a negative impact on our results of operations and financial condition. A smaller overall market for our products and services could also result in lower revenue and margins. In addition, healthcare payer organizations are increasing their focus on consumer directed healthcare, in which consumers interact directly with health plans through administrative services provided by health plans to employer groups. These services compete with the services provided by benefits administrators and could result in additional consolidation in the benefits administration market.

Some of our significant customers may develop their own software solutions, which could decrease the demand for our products.

Some of our customers in the healthcare payer industry have, or may seek to acquire, the financial and technological resources necessary to develop software solutions to perform the functions currently serviced by our products and services. Additionally, consolidation in the healthcare payer industry could result in additional organizations having the resources necessary to develop similar software solutions. If these organizations successfully develop and utilize their own software solutions, they may discontinue their use of our products or services, which could materially and adversely affect our results of operations.

We depend on our software application vendor relationships, and if our software application vendors terminate or modify existing contracts or experience business difficulties, or if we are unable to establish new relationships with additional software application vendors, it could harm our business.

We depend, and will continue to depend, on our licensing and business relationships with third-party software application vendors. Our success depends significantly on our ability to maintain our existing relationships with our vendors and to build new relationships with other vendors in order to enhance our services and application offerings and remain competitive. Although most of our licensing agreements are perpetual or automatically renewable, they are subject to termination in the event that we materially breach such agreements. We may not be able to maintain relationships with our vendors or establish relationships with new vendors. The software, products or services of our third-party vendors may not achieve or maintain market acceptance or commercial success. Accordingly, our existing relationships may not result in sustained business partnerships, successful product or service offerings or the generation of significant revenue for us.

Our arrangements with third-party software application vendors are not exclusive. These third-party vendors may not regard our relationships with them as important to their own respective businesses and operations. They may reassess their commitment to us at any time and may choose to develop or enhance their own competing distribution channels and product support services. If we do not maintain our existing relationships or if the economic terms of our business relationships change, we may not be able to license and offer these services and products on commercially reasonable terms or at all. Our inability to obtain any of these licenses could delay service development or timely introduction of new services and divert our resources. Any such delays could materially adversely affect our business, financial condition, operating results and cash flows.

Our licenses for the use of third-party software applications are essential to the technology solutions we provide for our customers. Loss of any one of our major vendor agreements may have a material adverse effect on our business, financial condition, operating results and cash flows.

We rely on third-party software vendors for components of our software products.

Our software products contain components developed and maintained by third-party software vendors, and we expect that we may have to incorporate software from third-party vendors in our future products. We may not be able to replace the functions provided by the third-party software currently offered with our products if that software becomes obsolete, defective, or incompatible with future versions of our products or is not adequately maintained or updated. Any significant interruption in the availability of these third-party software products or defects in these products could harm the sale of our products unless and until we can secure or develop an alternative source. Although we believe there are adequate alternate sources for the technology currently licensed to us, such alternate sources may not be available to us in a timely manner, may not provide us with the same functions as currently provided to us or may be more expensive than products we currently use.

We have sustained rapid growth, and our inability to manage this growth could harm our business.

We have rapidly and significantly expanded our operations since inception and may continue to do so in the future. This growth has placed, and may continue to place, a significant strain on our managerial, operational, and financial resources, and information systems. If we are unable to manage our growth effectively, it could have a material adverse effect on our business, financial condition, operating results, and cash flows.

 

28


Table of Contents

Our acquisition strategy may disrupt our business and require additional financing.

Since our initial public offering in October 1999, we have made ten acquisitions. A significant portion of our historical growth has occurred through acquisitions and we may continue to seek strategic acquisitions as part of our growth strategy. We compete with other companies to acquire businesses, making it difficult to acquire suitable companies on favorable terms or at all. Acquisitions may require significant capital, typically entail many risks, and can result in difficulties integrating operations, personnel, technologies, products and information systems of acquired businesses.

We may be unable to successfully integrate companies that we have acquired or may acquire in the future in a timely manner. If we are unable to successfully integrate acquired businesses, we may incur substantial costs and delays or other operational, technical or financial problems. In addition, the integration of our acquisitions may divert our management’s attention from our existing business, which could damage our relationships with our key customers and employees.

To finance future acquisitions, we may issue equity securities that could be dilutive to our stockholders. We may also incur debt and additional amortization expenses related to goodwill and other intangible assets as a result of acquisitions. The interest expense related to this debt and additional amortization expense may significantly reduce our profitability and have a material adverse effect on our business, financial condition, operating results and cash flows. Acquisitions may also result in large one-time charges as well as goodwill and intangible assets and impairment charges in the future that could negatively impact our operating results.

Our need for additional financing is uncertain as is our ability to raise capital if required.

If we are not able to sustain our positive net income, we may need additional financing to fund operations or growth. We may not be able to raise additional funds through public or private financings at any particular point in the future or on favorable terms. Future financings could adversely affect our common stock and debt securities.

Our business will suffer if our software products contain errors.

The proprietary and third party software products we offer are inherently complex. Despite our testing and quality control procedures, errors may be found in current versions, new versions or enhancements of our products. Significant technical challenges may also arise with our products because our customers purchase and deploy those products across a variety of computer platforms and integrate them with a number of third-party software applications and databases. If new or existing customers have difficulty deploying our products or require significant amounts of customer support, our costs would increase. Moreover, we could face possible claims and higher development costs if our software contains undetected errors or if we fail to meet our customers’ expectations. As a result of the foregoing, we could experience:

 

   

loss of or delay in revenue and loss of market share;

 

   

loss of customers;

 

   

damage to our reputation;

 

   

failure to achieve market acceptance;

 

   

diversion of development resources;

 

   

increased service and warranty costs;

 

   

legal actions by customers against us which could, whether or not successful, increase costs and distract our management; and

 

   

increased insurance costs.

We could lose customers and revenue if we fail to meet contractual obligations including performance standards and other material obligations.

Many of our service agreements contain performance standards and other post contract obligations. Our failure to meet these standards or breach other material obligations under our agreements could trigger remedies for our customers including termination, financial penalties and refunds that could have a material adverse effect on our business, financial condition, operating results and cash flows.

If our ability to expand our network and computing infrastructure is constrained in any way, we could lose customers and damage our operating results.

We must continue to expand and adapt our network and technology infrastructure to accommodate additional users, increased transaction volumes, changing customer requirements and technological obsolescence. We may not be able to accurately project the rate or timing of increases, if any, in the use of our hosted solutions 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

 

29


Table of Contents

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, which could have a material adverse effect on our business, financial condition, operating results and cash flows.

Performance or security problems with our systems could damage our business.

Our customers’ satisfaction and our business could be harmed if we, or our customers, experience any system delays, failures, or loss of data.

Although we devote substantial resources to avoid performance problems, errors may occur. Errors in the processing of customer data may result in loss of data, inaccurate information, and delays. Such errors could cause us to lose customers and be liable for damages. We currently process a substantial number of our customers’ transactions and data at our data centers in Colorado. Although we have safeguards for emergencies and we have contracted backup processing for our customers’ critical functions, the occurrence of a major catastrophic event or other system failure at any of our facilities could interrupt data processing or result in the loss of stored data. In addition, we depend on the efficient operation of telecommunication providers that 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 federally protected patient information in our data centers. Therefore, it is critical that our facilities and infrastructure remain secure and that our facilities and infrastructure are perceived by the marketplace to be secure. Despite the implementation of security measures, our infrastructure may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties, or similar disruptive problems.

Our services agreements generally contain limitations on liability, and we maintain insurance with appropriate coverage limits for general liability and professional liability to protect against claims associated with the use of our products and services. However, the contractual provisions and insurance coverage may not provide adequate coverage against all possible claims that may be asserted. In addition, appropriate insurance may be unavailable in the future at commercially reasonable rates. A successful claim in excess of our insurance coverage could have a material adverse effect on our business, financial condition, operating results, and cash flows. Even unsuccessful claims could result in litigation or arbitration costs and may divert management’s attention from our existing business.

Our success depends on our ability to attract, retain and motivate management and other key personnel.

Our success depends in large part on the continued services of management and key personnel. Competition for personnel in the healthcare information technology market is intense, and there are a limited number of persons with knowledge of, and experience in, this industry. We do not have employment agreements with most of our executive officers, so any of these individuals may terminate his or her employment with us at any time. The loss of services from one or more of our management or key personnel, or the inability to hire additional management or key personnel as needed, could have a material adverse effect on our business, financial condition, operating results, and cash flows. Although we currently experience relatively low rates of turnover for our management and key personnel, the rate of turnover may increase in the future. In addition, we expect to further grow our operations and our needs for additional management and key personnel will increase. Our continued ability to compete effectively in our business depends on our ability to attract, retain, and motivate these individuals.

We rely on an adequate supply and performance of computer hardware and related equipment from third parties to provide services to larger customers and any significant interruption in the availability or performance of third-party hardware and related equipment could adversely affect our ability to deliver our products to certain customers on a timely basis.

As we offer our hosted solution services and software to a greater number of customers and particularly to larger customers, we may be required to obtain specialized computer equipment from third parties that can be difficult to obtain on short notice. Any delay in obtaining such equipment may prevent us from delivering large systems to our customers on a timely basis. We also may rely on such equipment to meet required performance standards. We may have no control over the resources that third parties may devote to service our customers or satisfy performance standards. If such performance standards are not met, we may be adversely impacted under our service agreements with our customers.

Any failure or inability to protect our technology and confidential information could adversely affect our business.

Our success depends in part upon proprietary software and other confidential information. The software and information technology industries have experienced widespread unauthorized reproduction of software products and other proprietary technology. We rely on a combination of copyright, patent, 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.

 

30


Table of Contents

We execute confidentiality and non-disclosure agreements with certain employees and our suppliers, as well as limit access to and distribution of our proprietary information. The departure of any of our management and technical personnel, the breach of their confidentiality and non-disclosure obligations to us, or the failure to achieve our intellectual property objectives could have a material adverse effect on our business, results of operations and financial condition. We have had, and may continue to have, employees leave us and go to work for competitors. If we are not successful in prohibiting the unauthorized use of our proprietary technology or the use of our processes by a competitor, our competitive advantage may be significantly reduced which would result in reduced revenues.

Our products may infringe the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from selling our products.

We cannot be certain that our products do not infringe issued patents or other intellectual property rights of others. In addition, because patent applications in the United States and many other countries are not publicly disclosed until a patent is issued, applications covering technology used in our software products may have been filed without our knowledge. We may be subject to legal proceedings and claims from time to time, including claims of alleged infringement of the patents, trademarks and other intellectual property rights of third parties by us or our licensees in connection with their use of our products. Intellectual property litigation is expensive and time-consuming and could divert our management’s attention away from running our business and seriously harm our business. If we were to discover that our products violated the intellectual property rights of others, we would have to obtain licenses from these parties in order to continue marketing our products without substantial reengineering. We might not be able to obtain the necessary licenses on acceptable terms or at all, and if we could not obtain such licenses, we might not be able to reengineer our products successfully or in a timely fashion. If we fail to address any infringement issues successfully, we would be forced to incur significant costs, including damages and potentially satisfying indemnification obligations that we have with our customers, and we could be prevented from selling certain of our products.

If our consulting services revenue does not grow substantially, our revenue growth could be adversely impacted.

Our consulting services revenue represents a significant component of our total revenue and we anticipate that it will continue to represent a significant percentage of total revenue in the future. The level of consulting services revenue depends upon the healthcare industry’s demand for outsourced information technology services and our ability to deliver products that generate implementation and follow-on consulting services revenue. Our ability to increase services revenue will depend in part on our ability to increase the capacity of our consulting group, including our ability to recruit, train and retain a sufficient number of qualified personnel.

The insolvency of our customers or the inability of our customers to pay for our services could negatively affect our financial condition.

Healthcare payers are often required to maintain restricted cash reserves and satisfy strict balance sheet ratios promulgated by state regulatory agencies. In addition, healthcare payers are subject to risks that physician groups or associations within their organizations become subject to costly litigation or become insolvent, which may adversely affect the financial stability of the payer. If healthcare payers are unable to pay for our services because of their need to maintain cash reserves or failure to maintain balance sheet ratios or solvency, our ability to collect fees for services rendered would be impaired and our financial condition could be adversely affected.

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 substantially reform Medicare, Medicaid, and the healthcare system in general have been or are being considered by Congress. These proposals, if enacted, may further increase government involvement in healthcare, lower reimbursement rates, and otherwise adversely affect the healthcare industry which could adversely impact our business. The impact of regulatory developments in the healthcare industry is complex and difficult to predict, and our business could be adversely affected by existing or new healthcare regulatory requirements or interpretations.

Participants in the healthcare industry, such as our payer customers, are subject to extensive and frequently changing laws and regulations, including laws and regulations relating to the confidential treatment and secure transmission of patient medical records, and other healthcare information. Legislators at both the state and federal levels have proposed and enacted additional legislation relating to the use and disclosure of medical information, and the federal government may enact new federal laws or regulations in the near future. Pursuant to the Health Insurance Portability and Accountability Act of 1996

 

31


Table of Contents

(“HIPAA”), the Department of Health and Human Services has issued a series of regulations setting forth security, privacy and transactions standards for all health plans, clearinghouses, and healthcare providers to follow with respect to individually identifiable health information. Many of our customers are also subject to state laws implementing the federal Gramm-Leach-Bliley Act, relating to certain disclosures of nonpublic personal health information and nonpublic personal financial information by insurers and health plans.

Our payer customers must comply with HIPAA, its regulations, and other applicable healthcare laws and regulations. In addition, we may be deemed to be a covered entity subject to HIPAA because we offer our customers products that convert data to a HIPAA compliant format. Accordingly, we must comply with certain provisions of HIPAA and in order for our products and services to be marketable, they must contain features and functions that allow our customers to comply with HIPAA and other healthcare laws and regulations. We believe our products currently allow our customers to comply with existing laws and regulations. However, our products may require modification in the future. If we fail to offer solutions that permit our customers to comply with applicable laws and regulations, our business will suffer.

We perform billing and claims services that are governed by numerous federal and state civil and criminal laws. The federal government in recent years has imposed heightened scrutiny on billing and collection practices of healthcare providers and related entities, particularly with respect to potentially fraudulent billing practices, such as submissions of inflated claims for payment and upcoding. Violations of the laws regarding billing and coding may lead to civil monetary penalties, criminal fines, imprisonment, or exclusion from participation in Medicare, Medicaid and other federally funded healthcare programs for our customers and for us. Any of these results could have a material adverse effect on our business, financial condition, operating results, and cash flows.

In addition, laws governing healthcare payers are often not uniform among states. This could require us to undertake the expense and difficulty of tailoring our products in order for our customers to be in compliance with applicable state and local laws and regulations.

Part of our business is subject to government regulation relating to the Internet that could impair our operations.

The Internet and its associated technologies are subject to increasing government regulation. A number of legislative and regulatory proposals are under consideration by federal, state, local, and foreign governments, and agencies. Laws or regulations may be adopted with respect to the Internet relating to liability for information retrieved from or transmitted over the Internet, on-line content regulation, user privacy, taxation and quality of products and services. Many existing laws and regulations, when enacted, did not anticipate the methods of the Internet-based hosted, software and information technology solutions we offer. We believe, however, that these laws may be applied to us. We expect our products and services to be in substantial compliance with all material federal, state and local laws and regulations governing our operations. However, new legal requirements or interpretations applicable to the Internet could decrease the growth in the use of the Internet, limit the use of the Internet for our products and services or prohibit the sale of a particular product or service, increase our cost of doing business, or otherwise have a material adverse effect on our business, results of operations and financial conditions. To the extent that we market our products and services outside the United States, the international regulatory environment relating to the Internet and healthcare services could also have an adverse effect on our business.

Increased leverage as a result of our convertible note offerings may harm our financial condition and results of operations.

On October 5, 2005, we completed a private placement of $100.0 million aggregate principal amount of our 2.75% Convertible Senior Notes due 2025 (the “2025 Notes”). On April 17, 2007, we completed a private placement of $230.0 million aggregate principal amount of our 1.125% Convertible Senior Notes due 2012 (the “2012 Notes,” and together with the 2025 Notes, defined as the “Notes”). The indebtedness under the Notes constitutes senior unsecured obligations and will rank equal in right of payment with all of the Company’s existing and future senior unsecured debt and senior to all of the Company’s future subordinated debt. The Notes were issued pursuant to indentures with Wells Fargo Bank, National Association, as trustee (the “Indentures”).

As of March 31, 2008, our total consolidated long-term debt was $387.3 million. In addition, the Indentures do not restrict our ability to incur additional indebtedness, and we may choose to incur additional debt in the future. Our level of indebtedness could have important consequences to you, because:

 

   

it could affect our ability to satisfy our debt obligations under the Notes or our credit facility;

 

   

a substantial portion of our cash flows from operations will have to be dedicated to interest and principal payments of our debt obligations and may not be available for operations, expansion, acquisitions or other purposes;

 

   

it may impair our ability to obtain additional financing in the future;

 

32


Table of Contents
   

it may limit our flexibility in planning for, or reacting to, changes in our business and industry; and

 

   

it may make us more vulnerable to downturns in our business, our industry or the economy in general.

Our ability to make payments of principal and interest on our indebtedness depends upon our future performance, which will be subject to our success in marketing our products and services, general economic conditions and financial, business and other factors affecting our operations, many of which are beyond our control. If we are not able to generate sufficient cash flow from operations in the future to service our indebtedness, we may be required, among other things:

 

   

to seek additional financing in the debt or equity markets;

 

   

to refinance or restructure all or a portion of our indebtedness;

 

   

to sell assets; and/or

 

   

to reduce or delay planned expenditures on research and development and/or commercialization activities.

Such measures might not be sufficient to enable us to service our debt. In addition, any such financing, refinancing or sale of assets might not be available on economically favorable terms or at all.

We have certain repurchase and payment obligations under the Notes and we may not be able to repurchase such Notes or pay the amounts due upon conversion of the Notes when necessary.

On various dates, holders of certain of the Notes may require us to purchase, for cash, all or a portion of their Notes at 100% of their principal amount, plus any accrued and unpaid interest. If a fundamental change occurs, as defined in the Indentures, including a change in control transaction, holders of such Notes may also require us to repurchase, for cash, all or a portion of their Notes. In addition, upon conversion of such Notes if we have made an irrevocable election to settle conversion in cash, we would be required to satisfy our conversion obligation up to the principal amount of the Notes in cash. Our ability to repurchase the Notes and settle the conversion of the Notes in cash is effectively subordinated to our senior credit facility and may be limited by law, by the Indentures, by the terms of other agreements relating to our senior debt and by indebtedness and agreements that we may enter into in the future which may replace, supplement or amend our existing or future debt. Our failure to repurchase the Notes or make the required payments upon conversion would constitute an event of default under the Indentures, which would in turn constitute a default under the terms of our senior credit facility and other indebtedness at that time.

Our common stock price has been, and may continue to be, volatile and our shareholders may not be able to resell shares of our stock at or above the price paid for such shares.

The price for shares of our common stock has exhibited high levels of volatility with significant volume and price fluctuations, which makes our common stock unsuitable for many investors. For example, for the three months ended March 31, 2008, the closing price of our common stock ranged from a high of $20.77 to a low of $15.81. The fluctuations in price of our common stock have occasionally been related to our operating performance. These broad fluctuations may negatively impact the market price of shares of our common stock. The price of our common stock has also been influenced by:

 

   

fluctuations in our results of operations or the operations of our competitors or customers;

 

   

failure of our results of operations to meet the expectations of stock market analysts and investors;

 

   

changes in stock market analyst recommendations regarding us, our competitors or our customers; and

 

   

the timing and announcements of new products or financial results by us or our competitors.

Future issuances of common stock may depress the trading price of our common stock.

Any future issuance of equity securities, including the issuance of shares upon conversion of the Notes, could dilute the interests of our existing stockholders and could substantially decrease the trading price of our common stock. We may issue equity securities in the future for a number of reasons, including to finance our operations and business strategy, to adjust our ratio of debt to equity, to satisfy our obligations upon the exercise of outstanding warrants or options or for other reasons.

Our stockholder rights plan and charter documents could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders.

Our stockholder rights plan and certain provisions of our certificate of incorporation and Delaware law are intended to encourage potential acquirers to negotiate with us and allow our Board of Directors the opportunity to consider alternative proposals in the interest of maximizing shareholder value. However, such provisions may also discourage acquisition proposals or delay or prevent a change in control, which in turn, could harm our stock price.

 

33


Table of Contents
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth all purchases made by us of our common stock during each month within the first quarter of 2008.

 

Month

   Total Number of
Shares
(or Units)
Purchased
   Average Price Paid
per Share

(or Unit)
   Total Number of
Shares
(or Units)
Purchased as
Part of

Publicly
Announced
Plans or
Programs
   Maximum Number
(or Approximate
Dollar Value)
of Shares
(or Units) that
May Yet Be
Purchased
Under the Plans or
Programs

January 1, 2008 – January 31, 2008 (1)

   105,972    $ 17.98    94,253    —  

February 1, 2008 – February 29, 2008

   —        —      —      —  

March 1, 2008 – March 31, 2008 (2)

   3,687      18.37    —      —  
                 

Total

   109,659      17.99    94,253    —  
                 

 

(1) 11,719 shares of the 105,972 shares repurchased in January were in connection with the satisfaction of employee tax obligations upon the vesting of restricted stock awards.

 

(2) All 3,687 shares repurchased in March were in connection with the satisfaction of employee tax obligations upon the vesting of restricted stock awards.

 

34


Table of Contents
Item 6. Exhibits

The following exhibits are filed as part of this report:

 

EXHIBIT
NUMBER

  

DESCRIPTION

    2.1*

   Agreement and Plan of Merger, dated as of April 11, 2008, between TZ Holdings, L.P., TZ Merger Sub, Inc. and The TriZetto Group, Inc. (Incorporated by reference to Exhibit 2.1 of TriZetto’s Form 8-K as filed with the SEC on April 11, 2008, File No. 000-27501)

    4.1*

   Second Amendment to Rights Agreement, dated as of April 11, 2008, between TriZetto and Computershare Trust Company, N.A., as successor rights agent (Incorporated by reference to Exhibit 4.1 of TriZetto’s Form 8-K as filed with the SEC on April 11, 2008, File No. 000-27501)

  10.1

   Third Amendment to the Amended and Restated Credit Agreement, dated March 31, 2008, by and among TriZetto, each of TriZetto’s subsidiaries, and Wells Fargo Foothill, Inc.

  10.2

   Fourth Amendment to the Amended and Restated Credit Agreement, dated March 31, 2008, by and among TriZetto, each of TriZetto’s subsidiaries, and Wells Fargo Foothill, Inc.

  31.1

   Certification of CEO Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

  31.2

   Certification of CFO Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

  32.1

   Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

* Previously filed.

 

35


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    THE TRIZETTO GROUP, INC.
Date: May 9, 2008     By:   /S/ Carl Long
       

Carl Long

(Principal Accounting Officer

and Duly Authorized Officer)

 

36


Table of Contents

EXHIBIT INDEX

 

EXHIBIT

NUMBER

  

DESCRIPTION

    2.1*

   Agreement and Plan of Merger, dated as of April 11, 2008, between TZ Holdings, L.P., TZ Merger Sub, Inc. and The TriZetto Group, Inc. (Incorporated by reference to Exhibit 2.1 of TriZetto’s Form 8-K as filed with the SEC on April 11, 2008, File No. 000-27501)

    4.1*

   Second Amendment to Rights Agreement, dated as of April 11, 2008, between TriZetto and Computershare Trust Company, N.A., as successor rights agent (Incorporated by reference to Exhibit 4.1 of TriZetto’s Form 8-K as filed with the SEC on April 11, 2008, File No. 000-27501)

  10.1

   Third Amendment to the Amended and Restated Credit Agreement, dated March 31, 2008, by and among TriZetto, each of TriZetto’s subsidiaries, and Wells Fargo Foothill, Inc.

  10.2

   Fourth Amendment to the Amended and Restated Credit Agreement, dated March 31, 2008, by and among TriZetto, each of TriZetto’s subsidiaries, and Wells Fargo Foothill, Inc.

  31.1

   Certification of CEO Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

  31.2

   Certification of CFO Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

  32.1

   Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

 

* Previously filed.

 

37

Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki