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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________________ TO ___________________
COMMISSION FILE NUMBER 0-27501
THE TRIZETTO GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0761159
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
567 SAN NICOLAS DRIVE, SUITE 360
NEWPORT BEACH, CALIFORNIA 92660
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 719-2200
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of October 31, 2001, 44,467,508 shares, $0.001 par value per share, of the
registrant's common stock were outstanding.
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FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements:
Unaudited Condensed Consolidated Balance Sheets - as of September 30, 2001 and
December 31, 2000.................................................................... 3
Unaudited Condensed Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2001 and 2000............................................. 4
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2001 and 2000.......................................................... 5
Notes to Unaudited Condensed Consolidated Financial Statements....................... 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................... 9
Item 3 - Quantitative and Qualitative Disclosures about Market Risk........................... 14
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.................................................................... 15
Item 2 - Changes in Securities and Use of Proceeds............................................ 15
Item 6 - Exhibits and Reports on Form 8-K..................................................... 15
SIGNATURES....................................................................................... 16
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 62,487 $ 23,865
Short-term investments ................................. 11,635 3,019
Restricted cash ........................................ 1,597 1,500
Accounts receivable, net ............................... 31,694 18,102
Notes receivable ....................................... 144 2,263
Notes receivable from related parties .................. 124 277
Prepaid expenses and other current assets .............. 5,839 4,444
Income tax receivable .................................. 449 449
--------- ---------
Total current assets ............................... 113,969 53,919
Long-term investments ...................................... 4,300 --
Property and equipment, net ................................ 29,181 25,623
Notes receivable ........................................... 146 313
Note receivable from related party ......................... -- 25
Other assets ............................................... 12,345 2,264
Goodwill and other intangible assets, net .................. 238,541 281,607
--------- ---------
Total assets ....................................... $ 398,482 $ 363,751
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term notes payable and lines of credit ........... $ 17,560 $ 12,432
Capital lease obligations .............................. 2,212 2,123
Accounts payable ....................................... 4,649 9,502
Accrued liabilities .................................... 22,904 20,230
Income taxes payable ................................... 336 482
Deferred revenue ....................................... 28,093 16,991
--------- ---------
Total current liabilities .......................... 75,754 61,760
Long-term notes payable .................................... 3,770 264
Deferred taxes ............................................. 16,893 25,141
Capital lease obligations .................................. 2,583 3,303
Deferred revenue ........................................... 2,024 1,834
Other long-term liabilities ................................ 1,152 2,019
--------- ---------
Total liabilities .................................. 102,176 94,321
--------- ---------
Stockholders' equity:
Common stock ............................................... 44 35
Additional paid-in capital ................................. 398,925 330,061
Notes receivable from stockholders ......................... (41) (41)
Deferred stock compensation ................................ (6,727) (9,263)
Accumulated other comprehensive income ..................... (6) 8
Accumulated deficit ........................................ (95,889) (51,370)
--------- ---------
Total stockholders' equity ......................... 296,306 269,430
--------- ---------
Total liabilities and stockholders' equity ..... $ 398,482 $ 363,751
========= =========
See Notes to Unaudited Condensed Consolidated Financial Statements
3
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
REVENUE:
Recurring revenue ..................................... $ 39,407 $ 14,237 $ 103,063 $ 38,581
Non-recurring revenue ................................. 17,809 5,170 53,511 16,302
--------- --------- --------- ---------
Total revenue ............................................. 57,216 19,407 156,574 54,883
--------- --------- --------- ---------
COST OF REVENUE:
Recurring revenue (1) ................................. 27,701 12,953 76,707 35,824
Non-recurring revenue (2) ............................. 10,091 3,682 31,219 11,580
--------- --------- --------- ---------
Total cost of revenue ..................................... 37,792 16,635 107,926 47,404
--------- --------- --------- ---------
GROSS PROFIT .............................................. 19,424 2,772 48,648 7,479
--------- --------- --------- ---------
OPERATING EXPENSES:
Research and development (3) .......................... 3,768 1,436 13,332 4,651
Selling, general and administrative (4) ............... 11,987 7,300 38,571 21,914
Amortization of goodwill and acquired intangibles ..... 17,367 1,584 51,636 4,882
Write-off of acquired in-process technology ........... -- -- -- 536
--------- --------- --------- ---------
Total operating expenses .................................. 33,122 10,320 103,539 31,983
--------- --------- --------- ---------
LOSS FROM OPERATIONS ...................................... (13,698) (7,548) (54,891) (24,504)
Interest income ........................................... 815 315 1,670 922
Interest expense .......................................... (282) (466) (977) (647)
--------- --------- --------- ---------
LOSS BEFORE BENEFIT FROM INCOME TAXES ..................... (13,165) (7,699) (54,198) (24,229)
Benefit from income taxes ................................. 1,561 -- 9,679 --
--------- --------- --------- ---------
NET LOSS .................................................. $ (11,604) $ (7,699) $ (44,519) $ (24,229)
========= ========= ========= =========
Net loss per share:
Basic and diluted ..................................... $ (0.27) $ (0.37) $ (1.15) $ (1.21)
========= ========= ========= =========
Shares used in computing net loss per share:
Basic and diluted ..................................... 43,356 20,908 38,834 20,010
========= ========= ========= =========
- ----------
(1) Cost of recurring revenue for the three months ended September 30, 2001 and
2000, includes $80 and $114 of amortization of deferred stock compensation,
respectively. Cost of recurring revenue for the nine months ended September
30, 2001 and 2000, includes $511 and $329 of amortization of deferred stock
compensation, respectively.
(2) Cost of non-recurring revenue for the three months ended September 30, 2001
and 2000, includes $134 and $71 of amortization of deferred stock
compensation, respectively. Cost of non-recurring revenue for the nine
months ended September 30, 2001 and 2000, includes $406 and $213 of
amortization of deferred stock compensation, respectively.
(3) Research and development for the three months ended September 30, 2001 and
2000, includes $37 and $9 of amortization of deferred stock compensation,
respectively. Research and development for the nine months ended September
30, 2001 and 2000, includes $164 and $27 of amortization of deferred stock
compensation, respectively.
(4) Selling, general and administrative for the three months ended September 30,
2001 and 2000, includes $268 and $116 of amortization of deferred stock
compensation, respectively. Selling, general and administrative for the nine
months ended September 30, 2001 and 2000, includes $1,219 and $633 of
amortization of deferred stock compensation, respectively.
See Notes to Unaudited Condensed Consolidated Financial Statements
4
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2001 2000
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................................ $(44,519) $(24,229)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Provision for doubtful accounts .................................................... 2,337 887
Reserve for sales returns .......................................................... 664 --
Amortization of deferred stock compensation ........................................ 2,300 1,202
Amortization of deferred stock warrants ............................................ 181 21
Write-off of acquired in-process technology ........................................ -- 536
Depreciation and amortization of property and equipment ............................ 6,757 3,432
Amortization of goodwill and acquired intangibles .................................. 51,636 4,882
Gain on sale of property and equipment ............................................. (15) --
Loss on disposal of property and equipment ......................................... -- 155
Issuance of stock in exchange for services rendered ................................ -- 99
Forgiveness of note receivable ..................................................... 30 --
Deferred taxes ..................................................................... (9,801) --
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Restricted cash .................................................................... (97) --
Accounts receivable ................................................................ (14,085) (4,098)
Income tax receivable .............................................................. -- (13)
Prepaid expenses and other current assets .......................................... 28 (739)
Notes receivable ................................................................... 1,895 (22)
Other assets ....................................................................... (4,131) (241)
Accounts payable ................................................................... (4,966) 290
Accrued liabilities ................................................................ 2,840 2,987
Deferred revenue ................................................................... 11,273 1,183
-------- --------
Net cash provided by (used in) operating activities ..................................... 2,327 (13,668)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of short-term and long-term investments, net ....................................... (12,916) 6,648
Purchase of property and equipment and software licenses ................................ (5,222) (4,621)
Issuance of long-term note receivable ................................................... -- (1,147)
Increase in other assets ................................................................ (6,000) --
Acquisitions, net of cash acquired ...................................................... 846 (1,281)
Payment of acquisition-related costs .................................................... (2,020) (3,159)
-------- --------
Net cash used in investing activities ................................................... (25,312) (3,560)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable ............................................................... (904) (629)
Proceeds from line of credit ............................................................ -- 2,756
Proceeds from revolving line of credit, net ............................................. 2,582 --
Proceeds from equipment line of credit .................................................. -- 1,855
Proceeds from secured term note ......................................................... 6,000 4,000
Payments on capital leases .............................................................. (1,619) (941)
Payments on line of credit .............................................................. -- (2,756)
Payments on equipment line of credit .................................................... (653) (357)
Proceeds from employee purchase of common stock, net .................................... 690 515
Proceeds from exercise of employee stock options ........................................ 692 218
Proceeds from issuance of common stock, net ............................................. 54,833 --
-------- --------
Net cash provided by financing activities ............................................... 61,621 4,661
-------- --------
Net increase (decrease) in cash and cash equivalents .................................... 38,636 (12,567)
Effect of exchange rate changes on cash and cash equivalents ............................ (14) (3)
Cash and cash equivalents, beginning of period .......................................... 23,865 18,849
-------- --------
Cash and cash equivalents, end of period ................................................ $ 62,487 $ 6,279
======== ========
See Notes to Unaudited Condensed Consolidated Financial Statements
5
THE TRIZETTO GROUP, INC. AND SUBSIDIARIES
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/A for the fiscal year ended December 31, 2000 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 generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine months ended September
30, 2001 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2001, 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/A as
filed with the SEC on June 11, 2001.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the 2001
presentation.
2. COMPUTATION OF LOSS PER SHARE
Basic earnings per share ("EPS") is computed by dividing net loss by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common shares issuable
through stock options, warrants and other convertible securities. The following
is a reconciliation of the numerator (net loss) and the denominator (number of
shares) used in the basic and diluted EPS calculations (in thousands, except per
share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
BASIC AND DILUTED:
Net loss ....................................... $(11,604) $ (7,699) $(44,519) $(24,229)
-------- -------- -------- --------
Weighted average common shares outstanding ..... 43,356 20,908 38,834 20,010
-------- -------- -------- --------
Net loss per share ............................. $ (0.27) $ (0.37) $ (1.15) $ (1.21)
-------- -------- -------- --------
ANTIDILUTIVE SECURITIES:
Shares held in escrow .......................... 676 535 676 535
Options to purchase common stock ............... 5,999 3,463 5,999 3,463
Unvested portion of restricted stock ........... 371 11 371 11
Warrants ....................................... 300 300 300 300
-------- -------- -------- --------
7,346 4,309 7,346 4,309
======== ======== ======== ========
3. COMPREHENSIVE INCOME
The Company has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Comprehensive Income." SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
for general-purpose financial statements. Comprehensive income is defined as net
income plus all revenues, expenses, gains and losses from non-owner sources that
are excluded from net income in accordance with generally accepted accounting
principles. Total comprehensive loss was $11,615 and $7,700 for the three months
ended September 30, 2001 and 2000, respectively, and $44,533 and $24,232 for the
nine months ended September 30, 2001 and 2000, respectively, which includes the
net loss for each period and the foreign currency translation.
6
4. SUPPLEMENTAL CASH FLOW DISCLOSURES
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2001 2000
-------- --------
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION (IN THOUSANDS)
Cash paid for interest ..................................................................... 998 451
Cash paid for income taxes ................................................................. 227 63
NONCASH INVESTING AND FINANCING ACTIVITIES (IN THOUSANDS)
Assets acquired through capital lease .................................................... 1,159 2,688
Assets acquired through debt financing ................................................... 906 --
Deferred stock compensation .............................................................. (234) 515
Issuance of stock warrants ............................................................... -- 1,716
Goodwill adjustment for Finserv acquisition .............................................. -- 428
Common stock issued for acquisition of Healthcare Media Enterprises, Inc. ................ -- 3,500
Common stock issued to Healthcare Media Enterprises, Inc. for 2000 revenue commitment .... 188 --
Common stock issued for acquisition of Infotrust Company ................................. 12,890 --
5. ACQUISITION
On April 12, 2001, the Company acquired all of the issued and outstanding
shares of Infotrust Company ("Infotrust") from Trustco Holdings, Inc. Infotrust
serves healthcare payers, providing hosted applications services and outsourcing
of essential administrative processes. The purchase price of approximately $15.4
million consisted of 923,077 shares of common stock with a value of $13.96 per
share, assumed liabilities of $1.9 million, which includes $1.6 million of
deferred tax liability resulting from the difference between the book and tax
basis of the intangible assets arising as a result of the acquisition, and
acquisition costs of $647,000. Of the 923,077 shares of common stock which have
been issued in connection with this acquisition, 138,462 shares of the common
stock are held in escrow and are scheduled to be released in April 2002.
The acquisition was accounted for using the purchase method of accounting and
accordingly, the purchase price was allocated to the tangible and intangible
assets acquired and liabilities assumed on the basis of their estimated fair
market values on the acquisition date. The excess of the purchase price over the
estimated fair market value of the assets purchased and liabilities assumed was
$4.4 million and was allocated to goodwill.
6. SECURED TERM NOTE AND REVOLVING CREDIT NOTE AND LOAN AND SECURITY AGREEMENT
SECURED TERM NOTE
In September 2001, the Company executed a Secured Term Note facility with a
lending institution for $6.0 million. Monthly principal payments are due on the
first of each month for $200,000. Additionally, the note bears interest at prime
plus 1% and is payable monthly in arrears. The note contains certain convenants
that the Company must adhere to during the terms of the agreement, including a
minimum tangible net worth and cash balance.
REVOLVING CREDIT NOTE AND LOAN AND SECURITY AGREEMENT
In September 2000, the Company also entered into a Revolving Credit Note and
a Loan and Security Agreement with the same lender, providing for a revolving
credit facility in the maximum principal amount of $15.0 million. In September
2001, the Revolving Credit Note and the Loan and Security Agreement were amended
to provide for a maximum principal amount of $14.0 million and an expiration
date of March 2004.
7. STOCKHOLDERS' EQUITY
COMMON STOCK
In June 2001, the Company completed a secondary offering of 5,520,000 shares
of common stock, at a price of $9.25 per share, that raised approximately $47.6
million, net of underwriting discounts, commissions and other offering costs. In
connection with the offering, an additional 480,000 shares of common stock of
the Company were sold by selling stockholders at $9.25 per share, for which the
Company received no proceeds.
7
In July 2001, in connection with the exercise of the underwriters'
over-allotment option relating to the secondary offering, the Company issued
828,000 shares of common stock, at a price of $9.25 per share, that raised
approximately $7.3 million, net of underwriting discounts, commissions and other
offering costs. In connection with the exercise of the underwriters'
over-allotment option, an additional 72,000 shares of common stock of the
Company were sold by selling stockholders at $9.25 per share, for which the
Company received no proceeds.
8. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 141, Business Combinations ("Statement 141") and No. 142, Goodwill
and Other Intangible Assets ("Statement 142"), effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but, instead,
will be subject to annual impairment tests in accordance with Statements 141 and
142. Other intangible assets will continue to be amortized over their useful
lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. During 2002, the
Company will perform the first of the required impairment tests of goodwill and
indefinite lived intangible assets as of January 1, 2002 and has not yet
determined what effect, if any, applying those tests will have on the Company's
financial position and results of operations.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT HAVE BEEN MADE PURSUANT
TO THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE
STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. IN SOME
CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS "MAY",
"WILL", "SHOULD", "FORECASTS", "EXPECTS", "PLANS", "ANTICIPATES", "BELIEVES",
"ESTIMATES", "PREDICTS", "POTENTIAL", OR "CONTINUE" OR THE NEGATIVE OF SUCH
TERMS AND OTHER COMPARABLE TERMINOLOGY. THESE STATEMENTS ARE ONLY PREDICTIONS.
ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. IN EVALUATING THESE STATEMENTS,
YOU SHOULD SPECIFICALLY CONSIDER VARIOUS FACTORS, INCLUDING THE RISKS OUTLINED
IN OUR FORM 10-K/A UNDER THE CAPTION "RISK FACTORS." THESE FACTORS MAY CAUSE OUR
ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY FORWARD-LOOKING STATEMENTS. WE DO
NOT UNDERTAKE TO UPDATE ANY FORWARD-LOOKING STATEMENTS.
OVERVIEW
We provide industry-leading information technology solutions and services to
the healthcare industry, including remotely hosted applications, packaged,
proprietary software, an Internet platform, and consulting and business
outsourcing services. As of September 30, 2001, we served over 500 customers,
including managed care organizations, preferred provider organizations,
third-party administrators, provider groups and physician practice management
companies.
We offer three sets of complementary products and services: Application
Services Provider ("ASP") solutions, HealtheWare and HealthWeb. ASP solutions
offer pre-integrated, remotely hosted third-party and proprietary applications
and related services to healthcare payer organizations, benefits administrators
and providers on a monthly subscription fee basis. As part of our ASP solutions,
we also offer outsourcing of business processes and consulting services,
including information technology assessment and software development and
implementation. HealtheWare offers premium packaged software applications to the
payer and benefits administration markets on a licensed basis. HealthWeb is our
Internet platform, which facilitates information exchange and commerce over the
Internet between health plans and providers, employers and health plan members.
Our three sets of products and services allow us to offer comprehensive
integrated solutions to our customers while providing the opportunity to
cross-sell our services and diversify our sources of revenue.
Our revenue is classified into two categories: (i) recurring or multi-year
contractually-based revenue and (ii) revenue generated from non-recurring
agreements.
Recurring revenue from ASP solutions is subscription-based and billed monthly
over a contract term of typically three to seven years. The amount billed
monthly is based on units of volume, such as numbers of physicians, members or
desktops covered by each contract. Recurring software maintenance revenue is
typically based on one-year renewable contracts. Recurring revenue is recognized
ratably over the term of the contract. Non-recurring revenue from consulting
services is billed principally on either a time and materials or a fixed fee
basis and is recognized as the services are performed. Non-recurring revenue
from software license sales is recognized when revenue recognition criteria have
been satisfied. Cash received in excess of revenue recognized is recorded as
deferred revenue.
Cost of revenue are those costs related to the products and services we
provide to our customers and costs associated with the operation and maintenance
of our customer connectivity centers. These costs include salaries and related
expenses for consulting personnel, customer connectivity center personnel,
customer support personnel, application software license fees, amortization of
capitalized software development costs, telecommunications costs and maintenance
costs.
Research and development expenses are salaries and related expenses
associated with the development of software applications prior to establishment
of technological feasibility and include compensation paid to engineering
personnel and fees to outside contractors and consultants. Costs incurred
internally in the development of our software products are expensed as incurred
as research and development expenses until technological feasibility has been
established, at which time any future production costs are properly capitalized
and amortized to cost of revenue based on current and future revenue over the
remaining estimated economic life of the product.
9
Selling, general and administrative expenses consist primarily of salaries
and related expenses for sales, account management, marketing, administrative,
finance, legal, human resources and executive personnel, commissions, expenses
for marketing programs and trade shows and fees for professional services.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 2001 COMPARED TO THE QUARTER ENDED SEPTEMBER 30,
2000.
REVENUE. Total revenue in the third quarter of 2001 increased $37.8 million,
or 195%, to $57.2 million from $19.4 million for the same period in 2000. Of
this increase, $31.7 million was due to the acquisitions of Erisco Managed Care
Technologies, Inc. ("Erisco") and Resource Information Management Systems, Inc.
("RIMS") that occurred in the fourth quarter of 2000 and the acquisition of
Infotrust Company ("Infotrust") that occurred in the second quarter of 2001. The
remaining increase of $6.1 million primarily represented net growth in our ASP
business.
Recurring revenue in the third quarter of 2001 increased $25.2 million, or
177%, to $39.4 million from $14.2 million for the same period in 2000. Of this
increase, $19.1 million was generated by our acquisitions of Erisco, RIMS and
Infotrust. The remaining increase of $6.1 million primarily represented growth
in our ASP business.
Non-recurring revenue in the third quarter of 2001 increased $12.6 million,
or 244%, to $17.8 million from $5.2 million for the same period in 2000. Of this
increase, $12.6 million was generated by our acquisitions of Erisco, RIMS and
Infotrust. Also, TriZetto one-time software license sales increased $1.8 million
but was offset by a decrease of $1.8 million in consulting revenue and other
non-recurring revenue.
COST OF REVENUE. Cost of revenue in the third quarter of 2001 increased $21.2
million, or 127%, to $37.8 million from $16.6 million for the same period in
2000. Of this increase, $16.1 million represented incremental costs associated
with our acquisitions of Erisco, RIMS and Infotrust. The remaining increase of
$5.1 million was primarily due to the costs incurred to support the overall
expansion of our ASP business. As a percentage of total revenue, cost of revenue
approximated 66% in the third quarter of 2001 and 86% in the third quarter of
2000.
Cost of recurring revenue in the third quarter of 2001 increased $14.8
million, or 114%, to $27.7 million from $12.9 million for the same period in
2000. Of this increase, $10.0 million represented incremental costs associated
with our acquisitions of Erisco, RIMS and Infotrust. The remaining increase of
$4.7 million was primarily due to the costs incurred to support the overall
expansion of our ASP business, as well as increased network operation costs,
software license fees, and other costs required to support our increased
consulting services revenue. As a percentage of recurring revenue, cost of
recurring revenue approximated 70% in the third quarter of 2001 and 91% in the
third quarter of 2000.
Cost of non-recurring revenue in the third quarter of 2001 increased $6.4
million, or 174%, to $10.1 million from $3.7 million for the same period in
2000. Of this increase, $6.1 million was generated by our acquisitions of
Erisco, RIMS and Infotrust. The remaining increase of $325,000 was primarily due
to the costs incurred to support the increased one-time software license sales.
As a percentage of non-recurring revenue, cost of non-recurring revenue
approximated 57% in the third quarter of 2001 and 71% in the third quarter of
2000.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in the
third quarter of 2001 increased $2.4 million, or 162%, to $3.8 million from $1.4
million for the same period in 2000. Of this increase, $2.7 million was
generated by our acquisitions of Erisco and RIMS, which was partially offset by
a decrease of $320,000 related to the sunsetting of certain in-house products.
As a percentage of total revenue, research and development expenses approximated
7% in both the third quarter of 2001 and 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in the third quarter of 2001 increased $4.7 million, or
64%, to $12.0 million from $7.3 million for the same period in 2000. Of this
increase, $4.2 million represented incremental costs associated with our
acquisitions of Erisco, RIMS and Infotrust. The remaining increase of $525,000
was due primarily to growing our sales force and expanding our market presence
while introducing new products and integrated solutions to the market. As a
percentage of total revenue, selling, general and administrative expenses
approximated 21% in the third quarter of 2001 and 38% in the third quarter of
2000.
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AMORTIZATION OF GOODWILL AND ACQUIRED INTANGIBLES. Amortization of goodwill
and acquired intangibles in the third quarter of 2001 increased $15.8 million,
or 996%, to $17.4 million from $1.6 million for the same period in 2000. The
increase represented incremental costs associated with our acquisitions of
Erisco, RIMS and Infotrust.
INTEREST INCOME. Interest income in the third quarter of 2001 increased
$500,000, or 159%, to $815,000 from $315,000 for the same period in 2000. The
increase was due to the investment of $47.6 million of net proceeds from the
secondary offering of common stock completed in June 2001 and $7.3 million of
net proceeds in connection with the exercise of the underwriters' over-allotment
option relating to the June public offering.
INTEREST EXPENSE. Interest expense in the third quarter of 2001 decreased
$184,000, or 39%, to $282,000 from $466,000 for the same period in 2000. The
decrease was due to lower borrowing costs in 2000.
BENEFIT FROM INCOME TAXES. Benefit from income taxes was $1.6 million in the
third quarter of 2001 compared to zero for the same period in 2000. The benefit
was primarily generated from the net reduction of deferred tax liabilities
relating to the Erisco, RIMS and Infotrust acquisitions.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2000.
REVENUE. Total revenue in the first nine months of 2001 increased $101.7
million, or 185%, to $156.6 million from $54.9 million for the same period in
2000. Of this increase, $87.9 million was generated by the acquisitions of
Erisco, RIMS and Infotrust. The remaining increase of $13.8 million mostly
represented net growth in our ASP business.
Recurring revenue in the first nine months of 2001 increased $64.5 million,
or 167%, to $103.1 million from $38.6 million for the same period in 2000. Of
this increase, $50.5 million was generated by our acquisitions of Erisco, RIMS
and Infotrust. The remaining increase of $14.0 million primarily represented
growth in our ASP business.
Non-recurring revenue in the first nine months of 2001 increased $37.2
million, or 228%, to $53.5 million from $16.3 million for the same period in
2000. Of this increase, $37.4 million was generated by our acquisitions of
Erisco, RIMS and Infotrust. The remaining decrease of $235,000 resulted
primarily from the signing of long-term contracts by two customers of $3.5
million resulting in re-classification to recurring revenue, which was partially
offset by an increase of $3.3 million in consulting revenues and one-time
software licenses.
COST OF REVENUE. Cost of revenue in the first nine months of 2001 increased
$60.5 million, or 128%, to $107.9 million from $47.4 million for the same period
in 2000. Of this increase, $46.4 million represented incremental costs
associated with our acquisitions of Erisco, RIMS and Infotrust. The remaining
increase of $14.1 million was primarily due to the costs incurred to support the
overall expansion of our ASP business. As a percentage of total revenue, cost of
revenue approximated 69% in the first nine months of 2001 and 86% in the first
nine months of 2000.
Cost of recurring revenue in the first nine months of 2001 increased $40.9
million, or 114%, to $76.7 million from $35.8 million for the same period in
2000. Of this increase, $28.9 million represented incremental costs associated
with our acquisitions of Erisco, RIMS and Infotrust. The remaining increase of
$12.0 million was primarily due to the costs incurred to support the overall
expansion of our ASP business, as well as increased network operation costs,
software license fees, and other costs required to support our increased
consulting services revenue. As a percentage of recurring revenue, cost of
recurring revenue approximated 74% in the first nine months of 2001 and 93% in
the first nine months of 2000.
Cost of non-recurring revenue in the first nine months of 2001 increased
$19.6 million, or 170%, to $31.2 million from $11.6 million for the same period
in 2000. Of this increase, $17.5 million was generated by our acquisitions of
Erisco, RIMS and Infotrust. The remaining increase of $2.1 million was primarily
due to the costs incurred to support the increased consulting revenues and
one-time software license sales. As a percentage of non-recurring revenue, cost
of non-recurring revenue approximated 58% in the first nine months of 2001 and
71% in the first nine months of 2000.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in the
first nine months of 2001 increased $8.6 million, or 187%, to $13.3 million from
$4.7 million for the same period in 2000. Of this increase, $9.4 million
represented incremental research and development costs associated with our
acquisitions of Erisco and RIMS, which was partially offset by a decrease of
$750,000 related to the sunsetting of certain in-house products. As a percentage
of total revenue, research and development expenses approximated 9% in both the
first nine months of 2001 and approximately 8% in the first nine months of 2000.
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in the first nine months of 2001 increased $16.7
million, or 76%, to $38.6 million from $21.9 million for the same period in
2000. Of this increase, $12.0 million represented incremental costs associated
with our acquisitions of Erisco, RIMS and Infotrust. The remaining increase of
$4.7 million was due primarily to growing our sales force and expanding our
market presence while introducing new products and integrated solutions to the
market. As a percentage of total revenue, selling, general and administrative
expenses approximated 25% in the first nine months of 2001 and 40% in the first
nine months of 2000.
AMORTIZATION OF GOODWILL AND ACQUIRED INTANGIBLES. Amortization of goodwill
and acquired intangibles in the first nine months of 2001 increased $46.7
million, or 958% to $51.6 million from $4.9 million for the same period in 2000.
Of this increase, $46.2 million represented incremental costs associated with
our acquisitions of Erisco, RIMS and Infotrust. The remaining increase of
$468,000 was due primarily to the increase of amortization of goodwill from
other acquisitions.
WRITE OFF OF ACQUIRED IN-PROCESS TECHNOLOGY. Write off of acquired in-process
technology was zero in the first nine months of 2001 and $536,000 for the same
period in 2000. Our acquisition of Healthcare Media Enterprises, Inc. in January
2000 resulted in an excess of purchase price over the fair market value of the
net assets acquired of $6.8 million. Of this amount, $536,000 was allocated to
acquired in-process technology and was written off in January 2000.
INTEREST INCOME. Interest income in the first nine months of 2001 increased
$748,000 or 81%, to $1.7 million from $922,000 for the same period in 2000. The
increase was due to the investment of $47.6 million net proceeds from the
secondary offering of common stock completed in June 2001 and $7.3 million of
net proceeds in connection with the exercise of the underwriters' over-allotment
option relating to the June public offering.
INTEREST EXPENSE. Interest expense in the first nine months of 2001 increased
$330,000, or 51%, to $977,000 from $647,000 for the same period in 2000. The
increase was primarily due to increased borrowings under our revolving line of
credit and additional borrowings on new capital lease agreements.
BENEFIT FROM INCOME TAXES. Benefit from income taxes was $9.7 million in the
first nine months of 2001 compared to zero for the same period in 2000. The
benefit was primarily generated from the net reduction of deferred tax
liabilities relating to the Erisco, RIMS and Infotrust acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through a
combination of cash from operations, private financings, an initial public
offering of our common stock, cash obtained from our acquisition of Erisco and a
secondary public offering of our common stock. As of September 30, 2001, we had
approximately $64.1 million of cash and cash equivalents which includes $1.6
million in restricted cash.
Cash provided by operating activities for the nine months ended September 30,
2001 was $2.3 million. Cash provided during this period was primarily
attributable to a net loss of $44.5 million, which was more than offset by
depreciation and amortization, provision for doubtful accounts, reserve for
sales returns, amortization of deferred stock compensation and warrants,
amortization of goodwill and acquired intangibles, deferred taxes and other net
changes in operating assets and liability accounts.
Cash used in investing activities of $25.3 million for the nine months ended
September 30, 2001 was primarily the result of our purchase of $5.2 million in
property and equipment and software licenses, $2.0 million of payments for
acquisition-related costs resulting from our acquisitions of Erisco, RIMS and
Infotrust, $6.0 million for the purchase of a claims processing department (the
"Altius Transaction"), and the net sales of $12.9 million in short-term and
long-term equity investments, which was offset by the $846,000 cash acquired
from the Infotrust acquisition.
Cash provided by financing activities of $61.6 million for the nine months
ended September 30, 2001 was primarily the result of $2.6 million of net
proceeds from our revolving line of credit, $1.4 million in proceeds from the
issuance of common stock related to employee exercise of stock options and
employee purchase of common stock, $6.0 million proceeds from the term note, and
net proceeds of $54.8 million from the secondary offering of common stock
completed in June and July 2001. The increase in cash from these proceeds was
reduced by payments made on the line of credit as well as principal payments on
notes payable and capital lease obligations of $3.2 million.
In the third quarter of 2001, we amended our revolving credit facility to a
maximum principal amount of $14.0 million. The revolving credit facility is
collateralized by all of our receivables and expires in March 2004. Borrowings
under the revolving credit
12
facility are limited to and shall not exceed 80% of qualified accounts as
defined in the loan documents. Interest on the revolving credit facility is
prime plus 1.5%. Interest is payable monthly in arrears on the first business
day of the month. The revolving credit facility contains certain covenants,
including minimum tangible net worth as defined in the loan documents, the
generation of specified monthly net earnings before interest, depreciation and
amortization, and minimum cash balances. Our current credit facility prohibits
us from paying cash dividends without our lender's prior consent. As of
September 30, 2001, we had outstanding borrowings on the revolving credit
facility of $14.0 million.
In December 1999, we entered into a lease line of credit with a financial
institution. This lease line of credit was specifically established to finance
computer equipment purchases. The ability to borrow under the lease line of
credit, which had a limit of $2.0 million, expired as scheduled in December
2000. Borrowings under the lease line of credit at September 30, 2001 totaled
approximately $1.0 million, and are secured by the assets under lease. In
accordance with the terms of the lease line of credit, the outstanding balance
is being repaid in monthly installments of principal and interest through June
2003.
In March 1999, we entered into a revolving line of credit agreement with a
financial institution. In October 1999, we entered into a subsequent agreement
which increased the amount available under the line of credit. The line of
credit has a total capacity of $3.0 million and expires in December 2001.
Borrowings under the line of credit bear interest at prime plus 0.5% and are
collateralized by compensating cash balances on deposit. Interest is payable
monthly as it accrues. The line of credit agreement contains covenants that we
must adhere to during the term of the agreement including restrictions on the
payment of dividends. As of September 30, 2001, there were no outstanding
borrowings on the line of credit.
As of September 30, 2001, we have outstanding eight standby letters of credit
in the aggregate amount of $1.6 million which serve as security deposits for our
capital leases. We are required to maintain a cash balance equal to the
outstanding letters of credit, which is classified as restricted cash on the
balance sheet.
In June 2001, we completed a public offering of 5,520,000 shares of common
stock, at a price of $9.25 per share, that raised approximately $47.6 million,
net of underwriting discounts, commissions and other offering costs. In
connection with the offering, an additional 480,000 shares of our common stock
were sold by selling stockholders at $9.25 per share, for which we received no
proceeds.
In July 2001, in connection with the exercise of the underwriters'
over-allotment option relating to the June public offering, we sold 828,000
shares of common stock, at a price of $9.25 per share, that raised approximately
$7.3 million, net of underwriting discounts, commissions and other offering
costs. In connection with the exercise of the underwriters' over-allotment
option, an additional 72,000 shares of our common stock were sold by selling
stockholders at $9.25 per share, for which we received no proceeds.
In September 2001, the Company executed a Secured Term Note facility with a
lending institution for $6.0 million. Monthly principal payments are due on the
first of each month for $200,000. Additionally, the note bears interest at prime
plus 1% and is payable monthly in arrears. The note contains certain convenants
that the Company must adhere to during the terms of the agreement, including a
minimum tangible net worth and cash balance.
Based on our current operating plan, we believe existing cash, cash
equivalents and short-term investments balances, cash forecasted by management
to be generated by operations and borrowings from existing credit facilities
will be sufficient to meet our working capital and capital requirements for at
least the next twelve months. However, if events or circumstances occur such
that we do not meet our operating plan as expected, we may be required to seek
additional capital and/or to reduce certain discretionary spending, which could
have a material adverse effect on our ability to achieve our intended business
objectives. We may seek additional financing, which may include debt and/or
equity financing or funding through third party agreements. There can be no
assurance that any additional financing will be available on acceptable terms,
if at all. Any equity financing may result in dilution to existing stockholders
and any debt financing may include restrictive covenants.
13
ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact our financial
position, operating results, or cash flows due to adverse changes in financial
and commodity market prices and rates. We are exposed to market risk due to
changes in United States interest rates. This exposure is directly related to
our normal operating and funding activities. Historically, and as of September
30, 2001, we have not used derivative instruments or engaged in hedging
activities.
The interest rate on our $14.0 million revolving credit facility is prime
plus 1.5%. The revolving credit facility expires in March 2004. As of September
30, 2001, we had outstanding borrowings on the revolving line of credit of $14.0
million. Changes in interest rates have no impact on our other debt as all of
our other notes have fixed interest rates between 8% and 14%.
In September 2001, the Company executed a Secured Term Note facility with a
lending institution for $6.0 million. Monthly principal payments are due on the
first of each month for $200,000. Additionally, the note bears interest at prime
plus 1% and is payable monthly in arrears. The note contains certain convenants
that the Company must adhere to during the terms of the agreement, including a
minimum tangible net worth and cash balance.
We manage interest rate risk by investing excess funds in cash equivalents
and short-term investments bearing variable interest rates, which are tied to
various market indices. As a result, we do not believe that near-term changes in
interest rates will result in a material effect on our future earnings, fair
values or cash flows.
14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims
arising out of our operations in the normal course of business. As of the date
of this report, we are not a party to any legal proceedings, the adverse outcome
of which, in management's opinion, individually or in the aggregate, would have
a material adverse effect on our results of operations or financial position.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 13, 2001, our registration statement for shares of common stock was
declared effective by the SEC (File No. 333-58982). We completed the secondary
offering of 5,520,000 shares of common stock at $9.25 per share on June 19,
2001, raising net proceeds of $47.6 million. On July 11, 2001, we completed the
issuance of 828,000 additional shares at $9.25 per share in connection with the
exercise of the underwriters' over-allotment option, raising additional net
proceeds of $7.3 million. The selling stockholders sold 552,000 shares in the
secondary offering, including 72,000 shares in connection with the exercise of
the underwriters' over-allotment option, at a price of $9.25 per share, for
which we received no proceeds. We incurred $3.5 million in connection with the
issuance and distribution of securities registered for underwriting discounts
and commissions, legal and accounting expenses and other expenses. Bear, Stearns
& Co. Inc. and UBS Warburg LLC served as lead managing underwriters in the
offering and Salomon Smith Barney, Inc. served as co-managing underwriter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following exhibits are filed as a part of this report:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.1 Secured Term Note
10.2 Third Amended and Restated Revolving Credit Note
10.3 Amendment No. 3 to Loan and Security Agreement
(b) Reports on Form 8-K.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE TRIZETTO GROUP, INC.
Date: November 14, 2001 By: /s/ MICHAEL J. SUNDERLAND
-----------------------------
Michael J. Sunderland
Chief Financial Officer
(Principal Financial Officer
and Duly Authorized Officer)
16
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
10.1 Secured Term Note
10.2 Third Amended and Restated Revolving Credit Note
10.3 Amendment No. 3 to Loan and Security Agreement
17