1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: SEPTEMBER 30, 1999
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 (IRS Employer Identification Number)
of incorporation or organization)
567 SAN NICOLAS DRIVE
SUITE 360
NEWPORT BEACH, CALIFORNIA 92660
---------------------------------------
(Address of principal executive office)
(949) 718-4940
--------------------------------------------------
Registrant's telephone number, including area code
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 ( ) No (X)
There were 19,802,181 shares of the issuer's common stock, par value $.001 per
share, outstanding as of October 31, 1999.
1
2
THE TRIZETTO GROUP, INC.
INDEX TO FORM 10-Q
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Condensed Financial Statements:
Condensed Consolidated Balance Sheets -as of
September 30, 1999 (unaudited) and December 31, 1998 3
Unaudited Condensed Consolidated Statements of Operations
for the three months and nine months ended September 30, 1999
and 1998 4
Unaudited Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1999 and 1998 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3 - Quantitative and Qualitative Disclosures about Market Risks 18
PART II - OTHER INFORMATION
Item 2 - Changes in Securities and Use of Proceeds 19
Item 6 - Exhibits and Reports on Form 8-K 20
SIGNATURES 21
2
3
THE TRIZETTO GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,834 $ 3,681
Accounts receivable, net 4,984 3,083
Prepaid expenses and other current assets 812 219
Income tax receivable -- 406
Deferred taxes 885 191
-------- -------
Total current assets 8,515 7,580
Property and equipment, net 6,025 989
Other assets 87 115
Goodwill and other intangible assets, net 4,592 36
-------- -------
Total assets $ 19,219 $ 8,720
======== =======
LIABILITIES, MANDITORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Short-term note payable $ 903 $ 52
Capital lease obligations, current 554 28
Accounts payable 1,235 95
Accrued liabilities 4,676 1,815
Income taxes payable 77 --
Deferred revenue 80 --
-------- -------
Total current liabilities 7,525 1,990
Long-term notes payable 530 --
Note payable to related party 390 520
Capital lease obligations 1,014 125
Deferred taxes 362 377
-------- -------
Total liabilities 9,821 3,012
-------- -------
Manditorily redeemable convertible preferred stock:
Series A preferred stock 6,449 6,449
-------- -------
Series B preferred stock 4,483 --
-------- -------
Stockholders' deficit:
Common stock 10 9
Additional paid-in capital 8,790 940
Notes receivable from stockholders (41) (741)
Deferred stock compensation (6,213) (460)
Accumulated deficit (4,080) (489)
-------- -------
Total stockholders' decifit (1,534) (741)
-------- -------
Total liabilities, manditorily redeemable convertible
preferred stock and stockholders' deficit $ 19,219 $ 8,720
======== =======
See Notes to Unaudited Condensed Consolidated Financial Statements
3
4
THE TRIZETTO GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
1999 1998 1999 1998
------- ------- -------- -------
Revenues:
Recurring revenue $ 5,640 $ 1,447 $ 11,841 $ 4,037
Consulting revenue 3,386 1,951 9,894 4,414
------- ------- -------- -------
Total revenues 9,026 3,398 21,735 8,451
------- ------- -------- -------
Cost of revenues:
Recurring revenue 5,328 1,119 10,366 2,781
Consulting revenue 2,614 924 6,723 2,508
------- ------- -------- -------
Total cost of revenues 7,942 2,043 17,089 5,289
------- ------- -------- -------
Gross profit 1,084 1,355 4,646 3,162
------- ------- -------- -------
Operating expenses:
Research and development 741 257 1,181 849
Selling, general and administrative 2,275 825 5,373 1,998
Amortization of deferred stock compensation 412 4 627 4
Write-off of acquired in-process technology -- -- 484 --
------- ------- -------- -------
Total operating expenses 3,428 1,086 7,665 2,851
------- ------- -------- -------
Income (loss) from operations (2,344) 269 (3,019) 311
Interest income 44 69 120 129
Interest expense 77 16 177 41
------- ------- -------- -------
Income (loss) before provision for (benefit of) income
taxes (2,377) 322 (3,076) 399
Provision for (benefit of) income taxes (209) 186 (181) 231
------- ------- -------- -------
Net income (loss) $(2,168) $ 136 $ (2,895) $ 168
======= ======= ======== =======
Net income (loss) per share:
Basic $ (0.28) $ 0.03 $ (0.42) $ 0.03
======= ======= ======== =======
Diluted $ (0.28) $ 0.01 $ (0.42) $ 0.01
======= ======= ======== =======
Shares used in computing net income (loss) per share:
Basic 7,730 4,811 6,848 4,980
======= ======= ======== =======
Diluted 7,730 13,852 6,848 12,212
======= ======= ======== =======
See Notes to Unaudited Condensed Consolidated Financial Statements
4
5
THE TRIZETTO GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(2,895) $ 168
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for doubtful accounts 490 100
Amortization of deferred stock compensation 627 4
Write-off of acquired in-process technology 484 --
Forgiveness of note receivable 32 --
Stock compensation 53 --
Deferred taxes (709) --
Loss on disposal of property and equipment -- 114
Depreciation and amortization 1,229 117
Changes in operating assets and liabilities:
Accounts receivable (1,890) (1,720)
Prepaid expenses and other current assets (601) 84
Income tax receivable 406 --
Accounts payable 1,008 268
Accrued liabilities 2,782 1,216
Deferred revenue 80 (248)
Other long-term assets 11 (18)
------- -------
Net cash provided by operating activities 1,107 85
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment and software licenses (2,235) (617)
Purchase of MedPartners' assets (2,630) --
Acquisitions, net of cash acquired (1,238) --
------- -------
Net cash used in investing activities (6,103) (617)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock -- 9
Proceeds from issuance of manditorily redeemable
convertible preferred stock, net 4,483 5,950
Repurchases of common stock -- (720)
Proceeds from issuance of notes payable -- --
Payments on notes payable (579) (28)
Payments on line of credit (265) --
Principal payments on capital leases (279) --
Deferred issuance costs (247) --
Issuance of notes receivable -- (320)
Repayment of notes receivable 30 --
Proceeds from exercise of employee stock options 6 --
------- -------
Net cash provided by financing activities 3,149 4,891
------- -------
Net increase (decrease) in cash and short-term investments (1,847) 4,359
Cash and short-term investments, beginning of period 3,681 773
------- -------
Cash and short-term investments, end of period $ 1,834 $ 5,132
======= =======
See Notes to Unaudited Condensed Consolidated Financial Statements
5
6
THE TRIZETTO GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
1. BASIS OF PREPARATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by The TriZetto Group, Inc. ("the Company") in accordance with
generally accepted accounting principles for interim financial information and
pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of
the Securities and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three and nine
month periods ended September 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999, or for any
future period. These financial statements and notes should be read in conjuction
with the consolidated financial statements and footnotes thereto included in the
Company's Registration Statement on Form S-1, as amended (Registration No.
333-84533) which was declared effective by the Securities and Exchange
Commission on October 7, 1999.
6
7
THE TRIZETTO GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
2. COMPUTATION OF INCOME (LOSS) PER SHARE
Basic earnings per share ("EPS") is computed by dividing net income (loss)
by the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur from common shares
issuable through stock options, warrants and other convertible securities. The
following is a reconciliation of the numerator (net income (loss)) and the
denominator (number of shares) used in the basic and diluted EPS calculations
(in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1999 1998 1999 1998
-------- ------- -------- -------
BASIC:
Net income (loss) .......................... $ (2,168) $ 136 $ (2,895) $ 168
-------- ------- -------- -------
Weighted average common shares outstanding . 7,730 4,811 6,848 4,980
-------- ------- -------- -------
Net income (loss) per share ................ $ (0.28) $ 0.03 $ (0.42) $ 0.03
======== ======= ======== =======
DILUTED:
Net income (loss) .......................... $ (2,168) $ 136 $ (2,895) $ 168
-------- ------- -------- -------
Weighted average common shares outstanding . 7,730 4,811 6,848 4,980
Preferred stock ............................ -- 4,196 -- 2,367
Options to purchase common stock ........... -- 439 -- 147
Common stock subject to repurchase ......... -- 4,406 -- 4,718
-------- ------- -------- -------
Total weighted common stock and common stock
equivalents ............................. 7,730 13,852 6,848 12,212
-------- ------- -------- -------
Net income (loss) per share ................ $ (0.28) $ 0.01 $ (0.42) $ 0.01
======== ======= ======== =======
ANTIDILUTIVE SECURITIES:
Preferred stock ............................ 6,276 -- 6,276 --
Options to purchase common stock ........... 2,611 -- 2,012 --
Common stock subject to repurchase ......... 1,703 -- 2,898 --
Warrants ................................... -- 163 -- 163
-------- ------- -------- -------
10,590 163 11,186 163
======== ======= ======== =======
3. COMPREHENSIVE INCOME
The Company has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Comprehensive Income." SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
for general-purpose financial statements. Comprehensive income is defined as net
income plus all revenues, expenses, gains and losses from non-owner sources that
are excluded from net income in accordance with generally accepted accounting
principles. For all periods presented, there were no material differences
between comprehensive and net income.
7
8
THE TRIZETTO GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
4. STOCKHOLDERS' EQUITY
Warrants
In August 1999, the warrant to purchase 162,595 shares of common stock was
exercised raising proceeds of approximately $130,000.
5. SUPPLEMENTAL CASHFLOW DISCLOSURES
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------
1999 1998
----- ----
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION
Cash paid for interest 51 --
Cash paid for income taxes 42 --
NONCASH INVESTING AND FINANCING ACTIVITIES
Assets acquired through capital lease 1,694 160
Deferred stock compensation 6,380 --
Issuance of notes payable to acquire software
and software license 1,690 --
Common stock issued for Creative Business
Solutions 1,146 --
Notes payable issued for Creative Business
Solutions 270 --
Repurchase of shares in exchange for
stockholder notes receivable 700 --
Common stock issued to purchase assets of
Management and Technology Solutions, Inc 140 --
6. INITIAL PUBLIC OFFERING
The Company effected a registration with the Securities and Exchange
Commission on Form S-1, as amended, Registration No. 333-84533 (the
"Registration Statement"), whereby the Company registered up to 4,830,000 shares
of its Common Stock. On October 7, 1999 the Registration Statement was declared
effective by the Securities and Exchange Commission. On October 8, 1999, the
Company completed its initial public offering of 4,480,000 shares of Common
Stock, including 360,000 shares in connection with the exercise of underwriters'
over-allotment option, at a price of $9.00 per share, that raised approximately
$36.5 million, net of underwriting discounts, commissions and other offering
costs. In addition, in connection with the offering, 350,000 shares of Common
Stock of the Company were sold by a selling
8
9
stockholder at $9.00 per share, for which the Company received no proceeds. Upon
the closing of the offering, all of the Company's manditorily redeemable
convertible preferred stock converted into approximately 6,276,000 shares of
common stock.
7. DEFERRED COMPENSATION
As of September 30, 1999, the Company recorded deferred compensation related
to options granted to employees in the total amount of $6.9 million,
representing the difference between the deemed fair value of the common stock,
as determined for accounting purposes, and the exercise price of the options at
the day of grant. Of this amount, $22,000 has been amortized in 1998, and
approximately $627,000 has been amortized in the first nine months of 1999. The
Company amortizes deferred compensation over the vesting period of the
underlying options.
8. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," which established accounting and reporting
standards for derivative instruments and hedging activities. SFAS 133 is
effective for fiscal years beginning after June 15, 2000. It requires that an
entity recognizes all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. To
date, we have not engaged in derivative and hedging activities.
9
10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
OVERVIEW
We are a leading provider of remotely hosted third party and proprietary
software applications and related services for use in the healthcare industry.
We host software applications from leading software vendors, including Epic
Systems, Inc., Medic Computer Systems, Inc., Medical Manager Corporation and
McKesson HBOC, Inc., by operating and maintaining such applications at our
Customer Connectivity Centers. We also offer HealthWeb, an Internet-browser
based application that serves as a portal for the exchange of information and
services over the Internet. HealthWeb is designed to facilitate the exchange of
information and to enable e-commerce among all constituents of the healthcare
industry. Through our Professional Services Group, we offer business operations
and applications integration consulting services, including information
technology assessment and software implementation design and development. Our
customers primarily consist of provider groups, physician practice management
companies, and managed care organizations such as health maintenance
organizations, preferred provider organizations and third party administrators.
Our revenues are classified into two categories: recurring or multi-year
contractually based revenue, and revenue generated via consulting agreements.
Since inception, the relative percentages of consulting revenue and recurring
revenue were 49% and 51%, respectively. As we sign additional multi-year
application services contracts, we expect the relative percentage of recurring
revenue to increase.
Recurring revenue is subscription based and billed on a monthly basis over a
contract term of typically three to five years. The amount billed monthly is
based on units of volume, such as numbers of physicians, members or desktops
covered by each contract. Recurring revenue is recognized ratably over the term
of the contract, and cash received in excess of revenue recognized is recorded
as deferred revenue. Consulting revenue is billed on either a time and materials
or a fixed fee basis, and is recognized as the consulting services are
performed.
Cost of revenues are those costs related to the products and services we
provide to our customers, and costs associated with the operation and
maintenance of our Customer Connectivity Centers. These costs include salaries
and related expenses for consulting personnel, Customer Connectivity Centers
personnel, customer support personnel, application software license fees,
telecommunications and maintenance costs.
Research and development expenses are salaries and related expenses
associated with the development of technologies, applications and services and
include compensation paid to engineering personnel and fees to outside
contractors and consultants.
Selling, general and administrative expenses consist primarily of salaries
and related expenses for sales, account management, marketing, administrative,
finance, legal, human resources and
10
11
executive personnel, commissions, expenses for marketing programs and trade
shows and fees for professional services. We anticipate that sales, general and
administrative costs will continue to increase in absolute dollars as we add
sales, marketing and administrative personnel, increase our marketing and
promotional activities and incur costs related to being a public company, such
as directors' and officers' insurance premiums and professional fees.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO QUARTER ENDED SEPTEMBER 30, 1998 -
REVENUES. Total revenues in the third quarter of 1999 increased $5.6
million, or 166%, to $9.0 million from $3.4 million in 1998. The majority of
this increase was due to the overall growth in both recurring revenue and
consulting revenue throughout the three month period ended September 30, 1999.
Additionally, the acquisition of Creative Business Solutions and HealthWeb
Systems in February 1999 generated approximately $0.9 million in incremental
revenue in the third quarter of 1999.
Recurring revenue in the third quarter of 1999 increased $4.2 million, or
290%, to $5.6 million from $1.4 million for the same period in 1998. Of this
increase, $3.2 million represented the incremental revenue generated as a result
of our May 1999 agreement to provide hosted information technology services to
MedPartners with respect to 67 groups. The remaining increase was primarily due
to obtaining our first hosted managed care application services customer in
March 1999.
Consulting revenue in the third quarter of 1999 increased $1.4 million, or
74%, to $3.4 million from $2.0 million for the same period in 1998. This
increase reflected an overall increase in demand for our consulting services
throughout the three months ended September 30, 1999.
COST OF REVENUES. Cost of revenues for the three months ended September 30,
1999 increased $5.9 million, or 289%, to $7.9 million from $2.0 million for the
same period in 1998. This increase was due to the costs incurred to support the
overall expansion of our business, including our acquisition of Creative
Business Solutions and HealthWeb Systems in February 1999. As a percentage of
total revenues, cost of revenues approximated 88% in the third quarter 1999 and
60% in the third quarter 1998.
Cost of recurring revenue in the third quarter of 1999 increased $4.2
million, or 376%, to $5.3 million from $1.1 million in 1998. This increase
represented the incremental expenses for personnel and facilities costs incurred
to support the growing application services provider business, including the
incremental costs associated with the MedPartners contract signed in May 1999.
Additionally, incremental infrastructure costs were required in the third
quarter of 1999 to support our transition from our former data center to our new
Customer Connectivity Center in Englewood, Colorado. As a percentage of
recurring revenue, cost of recurring revenue approximated 95% in the third
quarter of 1999 and 77% in the third quarter of 1998.
Cost of consulting revenue in the third quarter of 1999 increased $1.7
million, or 183%, to $2.6 million from $924,000 in the third quarter of 1998.
This increase was due to incremental
11
12
costs required to support increasing demand for our consulting services in the
three months ended September 30, 1999. As a percentage of consulting revenue,
cost of consulting revenue approximated 77% in the third quarter of 1999 and 47%
in the third quarter of 1998.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in the
third quarter of 1999 increased $484,000, or 188%, to $741,000 from $257,000 for
the same period in 1998. The increase was primarily due to a significant
increase in the amount of resources engaged in the development of our
applications and services. Expenses relating to system enhancements from which
we derive revenue are not classified as research and development and are
included in cost of revenues. As a percentage of total revenues, research and
development expenses approximated 8% in the third quarter of 1999 and 8% in the
third quarter of 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in the third quarter of 1999 increased $1.5 million, or
176%, to $2.3 million from $825,000 for the same period in 1998. This increase
was due primarily to expansion of the sales force, staff growth in management
and administrative support areas, and expansion of related office space. As a
percentage of total revenues, selling, general and administrative expenses
approximated 25% in the third quarter of 1999 and 24% in the third quarter of
1998.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. Amortization of deferred stock
compensation increased $408,000 in the third quarter of 1999 to $412,000 from
$4,000 for the same period in 1998. This amount represents the allocated portion
of the difference between the deemed fair value of our common stock and the
exercise price of stock options granted by us to employees.
INTEREST INCOME. Interest income in the third quarter of 1999 decreased
$25,000, or 36%, to $44,000 from $69,000 for the same period in 1998. The
decrease was due to the decrease in cash available for investing.
INTEREST EXPENSE. Interest expense in the third quarter of 1999 increased
$61,000, or 381%, to $77,000 from $16,000 for the same period in 1998. The
increase was due to interest paid on notes payable issued in February 1999 in
connection with our purchase of HealthWeb and Creative Business Solutions,
capital lease obligations and notes payable in connection with our purchase of
software applications licenses.
PROVISION FOR (BENEFIT OF) INCOME TAXES. Provision for income tax for the
three months ended September 30, 1999 decreased $395,000, or 212%, to an income
tax benefit of $209,000 from an income tax provision of $186,000 for the same
period in 1998. The income tax benefit was primarily due to increased losses for
both book purposes and tax purposes in 1999.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998 -
REVENUES. Total revenues in the first nine months of 1999 increased $13.2
million, or 157%, to $21.7 million from $8.5 million in the first nine months of
1998. The majority of this increase was due to the overall growth in both
recurring revenue and consulting revenue throughout the nine month period ended
September 30, 1999. Additionally, the acquisition of Creative Business
12
13
Solutions and HealthWeb Systems in February 1999 generated approximately $2.4
million in incremental revenue for the first nine months of 1999.
Recurring revenue in 1999 increased $7.8 million, or 193%, to $11.8 million
from $4.0 million for the same period in 1998. Of this increase, $6.2 million
represented the incremental revenue generated as a result of our May 1999
agreement to provide hosted information technology services to MedPartners with
respect to 67 groups. The remaining increase was primarily due to obtaining our
first hosted managed care application services customer in March 1999.
Consulting revenue in the first nine months of 1999 increased $5.5 million,
or 124%, to $9.9 million from $4.4 million for the same period in 1998. This
increase reflected an overall increase in demand for our consulting services
throughout the first nine months of 1999.
COST OF REVENUES. Cost of revenues in the first nine months of 1999
increased $11.8 million, or 223%, to $17.1 million from $5.3 million in the
first nine months of 1998. This increase was due to the costs incurred to
support the overall expansion of our business, including our acquisition of
Creative Business Solutions and HealthWeb Systems in February 1999. As a
percentage of total revenues, cost of revenues approximated 79% in 1999 and 63%
in 1998.
Cost of recurring revenue in the first nine months of 1999 increased $7.6
million, or 273%, to $10.4 million from $2.8 million in the first nine months of
1998. This increase represented the incremental expenses for personnel and
facilities costs incurred to support the growing application services provider
business, including the incremental costs associated with the MedPartners
contract signed in May 1999. Additionally, incremental infrastructure costs were
required in the first nine months of 1999 to support our transition from our
former data center to our new Customer Connectivity Center in Englewood,
Colorado. As a percentage of recurring revenue, cost of recurring revenue
approximated 88% for the first nine months of 1999 and 69% for the same period
in 1998.
Cost of consulting revenue in the first nine months of 1999 increased $4.2
million, or 168%, to $6.7 million from $2.5 million in the first nine months of
1998. This increase was due to incremental costs required to support increasing
demand for our consulting services in the first nine months of 1999. As a
percentage of consulting revenue, cost of consulting revenue approximated 68%
for the first nine months of 1999 and 57% for the same period in 1998.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in the
first nine months of 1999 increased $332,000, or 39%, to $1.2 million from
$849,000 for the same period in 1998. The increase was primarily due to a
significant increase in the amount of resources engaged in the development of
our applications and services. Expenses relating to system enhancements from
which we derive revenue are not classified as research and development and are
included in cost of revenues. As a percentage of total revenues, research and
development expenses approximated 5% for the first nine months of 1999 and 10%
for the same period in 1998.
13
14
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in the first nine months of 1999 increased $3.4 million,
or 169%, to $5.4 million from $2.0 million for the same period in 1998. This
increase was due primarily to expansion of the sales force, staff growth in
management and administrative support areas, and expansion of related office
space. As a percentage of total revenues, selling, general and administrative
expenses approximated 25% for the first nine months of 1999 and 24% for the same
period in 1998.
AMORTIZATION OF DEFERRED STOCK COMPENSATION. Amortization of deferred stock
compensation increased $623,000 in the first nine months of 1999 to $627,000
from $4,000 for the same period in 1998. This amount represents the allocated
portion of the difference between the deemed fair value of our common stock and
the exercise price of stock options granted by us to employees.
WRITE OFF OF ACQUIRED IN-PROCESS TECHNOLOGY. Our acquisition of Creative
Business Solutions and HeathWeb Systems in February 1999 resulted in an excess
of purchase price over the fair market value of the assets purchased and
liabilities assumed of $2.5 million. Of this amount, $484,000 was allocated to
acquired in-process technology, based upon an independent appraisal, and was
written-off in the nine months ended September 30, 1999.
INTEREST INCOME. Interest income in the first nine months of 1999 decreased
$9,000, or 7%, to $120,000 from $129,000 in the first nine months of 1998. The
decrease was due to the decrease in cash available for investing.
INTEREST EXPENSE. Interest expense in the first nine months of 1999
increased $136,000, or 332%, to $177,000 from $41,000 for the same period in
1998. The increase was due to interest paid on notes payable issued in February
1999 in connection with our purchase of HealthWeb and Creative Business
Solutions, capital lease obligations and notes payable in connection with our
purchase of software applications licenses.
PROVISION FOR (BENEFIT OF) INCOME TAXES. Provision for income tax in the
first nine months of 1999 decreased $412,000, or 178%, to an income tax benefit
of $181,000 from an income tax provision of $231,000 for the same period in
1998. The income tax benefit was primarily due to increased losses for both book
purposes and tax purposes in 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through a
combination of cash from operations and private financings. The increase in
operating cash in the nine months ended September 30, 1999 was due primarily to
growth in our operations, specifically increases in net income after considering
non-cash expenses and normal fluctuations in working capital, increases in
accounts payable and accrued expenses, partially offset by an increase in
accounts receivable.
14
15
The increase in cash used in investing activities in the nine months ended
September 30, 1999 was primarily the result of our acquisition of $2.6 million
of hardware, furniture and fixtures and software licenses from MedPartners in
May 1999, our acquisition of $1.1 million of software licenses related to the
MedPartners agreement signed in May 1999, and the $1.2 million cash portion (net
of cash acquired) of our acquisition of HealthWeb and Creative Business
Solutions in February 1999
The decrease in cash provided by financing activities in the nine months
ended September 30, 1999 compared to the nine months ended September 30, 1998
was primarily the result of gross proceeds raised in our April 1998 private
financing of $6,000,000, compared to the gross proceeds raised in our April 1999
private financing of $4,500,000. The April 1999 proceeds were reduced by
payments we made totaling $698,000 to eliminate the line of credit assumed with
the Creative Business Solutions acquisition, to pay down notes payable and
capital lease obligations. The April 1998 proceeds were reduced by payments we
made totaling $1,048,000 consisting of loans made to employees, to repurchase
common stock from a former employee and pay down notes payable.
In March 1999, we entered into a revolving line of credit agreement with a
financial institution. The total amount available for borrowings under the line
of credit is $1,500,000 and expires in March 2000. Borrowings under the line of
credit bear interest at the bank's prime rate plus 0.5%. Interest is payable
monthly as it accrues. The credit agreement contains certain covenants that we
must adhere to during the term of the agreement, including restrictions on the
payment of dividends. As of September 30, 1999 and October 31, 1999, there were
no outstanding borrowings on the line of credit. However, we have two
outstanding standby letters of credit in the amounts of $85,000 and $38,000
which serve as security deposits for two of our capital leases.
We believe existing cash balances, cash generated from operations, future
borrowings under our line of credit and the proceeds from this offering will be
sufficient to meet our working capital and capital requirements for at least the
next 12 months.
IMPACT OF THE YEAR 2000
Many currently installed computer systems and software products are written
using two digits rather than four to define the applicable year. These systems
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures or miscalculations causing disruptions of
operations for any company using such computer systems or software, including,
among other things, a temporary inability to process transactions, send invoices
or engage in normal business activities. As a result, many companies' computer
systems may need to be upgraded or replaced in order to avoid this "Year 2000"
issue.
STATE OF READINESS. We are a fairly new enterprise, and, accordingly, the
majority of the software and hardware we use to manage our business has been
purchased or developed by us since inception. Generally, hardware and software
design within the current decade and the past several years in particular has
considered the Year 2000 issue. All of the software codes we have
15
16
internally developed to manage our network traffic is written with four digits
to define the applicable year.
RISKS. Testing has been completed on our internal information technology
systems and non-information technology systems. All of the testing has either
been performed by our own personnel or by the original software vendors. We
believe that such software is Year 2000 compliant.
In addition to our internally developed software, we use and license
software and hardware developed by third parties. To date, we have not done any
testing of such third party software or hardware to determine Year 2000
compliance. We have, however, obtained certifications from our key suppliers of
hardware and networking equipment for our data centers that such hardware and
networking equipment is Year 2000 compliant. These certifications provide
assurance that our hardware and networking equipment are Year 2000 compliant,
but may not provide grounds for legal recourse should the certifications prove
to be incorrect. Additionally, we have received assurances from the providers of
key software applications that their software is Year 2000 compliant. Based upon
an initial evaluation of our broader list of software and hardware providers, we
are aware that all of these providers are in the process of reviewing and
implementing their own Year 2000 compliance programs, and we will work with
these providers to address the Year 2000 issue and continue to seek assurances
from them that their products are Year 2000 compliant.
We also rely on third party network infrastructure providers to gain access
to the Internet. If such providers experience business interruptions as a result
of their failure to achieve Year 2000 compliance, our ability to provide
Internet connections could be impaired, which could have a material adverse
effect on our business, results of operations and financial condition. According
to a June 1999 article in Health Data Management, the healthcare industry is one
of the least prepared industries in the United States. Industry sources cited in
this article claim that healthcare software application vendors will discontinue
distribution of as many as 1,000 software applications that are not Year 2000
compliant. In addition, many healthcare providers and payors have encountered
difficulties when trying to get vendors to respond to Year 2000 compliance
inquiries. Many of our customers in the healthcare industry are not Year 2000
compliant, and the impact of widespread customer failure on our systems is
difficult to determine. Customer difficulties due to Year 2000 issues could
interfere with healthcare transactions or information, which might expose us to
significant potential liability. If customer failures result in the failure of
our systems, it could have a material adverse effect on our business, financial
condition and operating results. Furthermore, the purchasing patterns of these
customers or potential customers may be affected by Year 2000 issues as
companies expend significant resources to become Year 2000 compliant. The costs
of becoming Year 2000 compliant for current or potential customers may result in
reduced funds being available to purchase and implement our applications and
services.
COSTS. We have incurred approximately $650,000 to date, and we do not
anticipate that any future costs associated with our Year 2000 remediation
efforts will be material. However, if our customers, our providers of hardware
and software, our third party network providers or we fail to remedy any Year
2000 issues, our services and various transactions could be interrupted and
16
17
we could experience a material loss of revenues that could have a material,
adverse effect on our business, financial condition and operating results. We
would consider such an interruption to be the most reasonably likely unfavorable
result of any failure by us, or failure by the third parties upon which we rely,
to achieve Year 2000 compliance. Presently, we believe we are unable to
reasonably estimate the duration and extent of any such interruption or quantify
the effect it may have on our future revenues.
CONTINGENCY PLAN. We have yet to complete a comprehensive contingency plan
to address the issues that could result from such an event. We are in the
process of developing such a plan in the event our ongoing assessment leads us
to conclude we have significant exposure based upon the likelihood of such an
event.
FORWARD LOOKING STATEMENTS
This report contains certain forward looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, and we intend that such forward
looking statements be subject to the safe harbors created thereby. Examples of
these forward looking statements included, but are not limited to:
o our ability to enter into direct contracts with medical practice groups
formerly associated with MedPartners.
o the amount of anticipated increases of our costs and expenses.
o the completion and viability of the HealthWeb project.
o the cash flow projections of acquired businesses.
o the anticipated costs related to Year 2000 issues.
While these statements made by us are based on our current beliefs and
judgment, they are subject to risks and uncertainties that could cause actual
results to vary.
In evaluating such statements, stockholders and investors should
specifically consider a number of factors and assumptions, including those
discussed in the tax and the financial statements and their accompanied
footnotes in this Report and the risk factors detailed from time to time in our
filings with the Securities and Exchange Commission. As discussed in the
prospectus included in the Form S-1, as amended, Registration Statement
effective October 7, 1999, actual results could differ materially from those
projected in the forward looking statements as a result of the following
factors, among others:
o the effectiveness of the implementation of our business plan.
o the market's acceptance of our services.
o risks associated with management of growth.
17
18
o reliance on third parties to supply software and key components of our
services.
o the attraction and retention of key employees.
o the variability of quarterly operating results, including the effects of
client purchasing patterns due to Year 2000 issues.
o Competitive factors.
o Risks associated with acquisitions.
o Changes in demand for third party products or solutions which form the
basis of our service offerings.
o Risks associated with rapidly changing technology.
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, 1999, we have not used derivative instruments or engaged in hedging
activities.
The interest payable on our $1.5 million credit facility is variable based
on the prime rate, and, therefore, affected by changes in market interest rates.
Although as of September 30, 1999, the amount outstanding on our credit facility
was zero, letters of credit approximating $125,000 had been written against the
credit facility. The line of credit expires in March 2000. Changes in interest
rates have no impact on our other debt as all of our other notes are at fixed
interest rates between 8% and 10%. We manage interest rate risk by investing
excess funds in cash equivalents and short-term investments bearing variable
interest rates, which are tied to various market indices. As a result, we do not
believe that near-term changes in interest rates will result in a material
effect on our future earnings, fair values or cash flows.
18
19
PART II: OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company effected a registration with the Securities and Exchange
Commission on Form S-1, as amended, Registration No. 333-84533 (the
"Registration Statement"), whereby the Company registered up to 4,830,000 shares
of its Common Stock, On October 7, 1999, the Registration Statement was declared
effective by the Securities and Exchange Commission. On October 8, 1999, the
Company completed its initial public offering of Common Stock (the "IPO") by
consummating the sale of 4,480,000 shares of its Common Stock, including 360,000
shares in connection with the exercise of underwriters' overallotment option, to
the underwriters identified in the Registration Statement, Bear, Stearns & Co.,
Inc., Donaldson, Lufkin & Genrette, Adams, Harkness & Hill, Inc., and WIT
Capital Corporation serving as the representatives thereof. The price of the
Company's Common Stock was $9.00 per share, less underwriting discounts and
commissions of $0.63 per share. The Company received net proceeds of $37.5
million from the sale of the 4,480,000 shares of Common Stock before deducting
offering expenses. Effective upon the closing of the IPO, all of the Company's
manditorily redeemable convertible preferred stock converted into approximately
6,276,000 shares of the Company's Common Stock.
In addition, in connection with the offering, 350,000 shares of Common Stock
of the Company were sold by a selling stockholder at $9.00 per share, for which
the Company received no proceeds.
In conjunction with completing the IPO, the Company incurred total direct
offering expenses of approximately $1.3 million, all of which were payable to
third parties. Total net proceeds to the Company from the IPO and the exercise
of the over-allotment option, after deducting underwriting discounts and
commissions and total direct offering expenses, was $36.2 million.
As of October 31, 1999, the Company has used a total of approximately $1.8
million of which $985,000 was used for working capital and other general
corporate purposes, $390,000 was used to pay down debt, and $425,000 was used
for the purchase of property and equipment.
19
20
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 of Exhibit
-------------- ----------------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any current reports on Form 8-K during the
three months ended September 30, 1999.
There were no other items to be reported under Part II of this report.
20
21
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 19, 1999 By: /s/ MICHAEL S. SUNDERLAND
-------------------------------------
Michael S. Sunderland
Chief Financial Officer
(Principal Financial Officer and Duly
Authorized Officer)
21
22
EXHIBIT INDEX
Exhibit Number Description of Exhibit Page
- -------------- ---------------------- ----
27.1 Financial Data Schedule